The big payback: how corruption taints offset agreements in international defense trade.
I. INTRODUCTION II. DEFENSE OFFSETS AND THEIR CORRUPTION RISKS A. Questionable Inducements in Competitive Sales B. Disparate Policy Goals C. Complex and Opaque Transactions D. Third Party Agents III. MAJOR INTERNATIONAL OFFSET REGULATIONS A. Agreement on Government Procurement B. European Union Regulations C. United States Regulations. IV. MAJOR INTERNATIONAL ANTI-CORRUPTION OFFENSES A. Bribery of a Foreign Official B. Commercial Bribery. C. Recordkeeping and Internal Control Violations D. Failure of a Commercial Organization to Prevent Bribery E. False Claims In Foreign Military Sales V. TRACING CORRUPTION PATHWAYS IN OFFSET TRANSACTIONS A. Formation of Offset Proposals B. Award of Offset Credit VI. REDUCING THE RISK OF DEFENSE OFFSET CORRUPTION A. Proposed OECD Convention on Offsets 1. Transparency Proposals 2. Valuation Proposals 3. Competition Proposals B. Vendor Compliance Initiatives 1. Due Diligence Proposals 2. Documentation and Auditing Proposals VII. CONCLUSION
When Parliament passed the U.K. Bribery Act 2010, the Act was prompted in no small part by defense industry corruption. (1) A Serious Fraud Office (SFO) investigation of BAE Systems (a major British aerospace firm) which discovered that for over twenty years, BAE paid 6 billion [pounds sterling]($9.7 billion) in bribes to members of the Saudi royal family in exchange for defense contracts totaling 43 billion [pounds sterling] ($69.4 billion). (2) BAE paid for its bribes, in part, by submitting fraudulently inflated bills to the Saudi government. In one contract, BAE inflated a contract by thirty-two percent to pay for 600 million [pounds sterling] ($970 million) in bribes. (3) In short, BAE bribed the Saudi royal family by stealing from the Saudi treasury. (4) As the SFO further investigated BAE, more allegations of bribery emerged, including an allegation of 24 million Rand ($3 million) in BAE bribes to South African officials. (5) The allegation centered on an arcane practice in defense trade--the use of a reciprocal transaction, or "offset," in the satisfaction of BAE's South African contract. (6) Specifically, BAE allegedly bribed South African officials to not only receive a fighter jet procurement, but also to be released from its offset obligations. (7) As the South African government continues investigating BAE, (8) anti-corruption advocates are now asking their own questions: what are defense offsets, and how susceptible are they to corruption?
A defense offset is an agreement to do specific future business in a country in exchange for the award of a defense contract. (9) In a 2010 report, Transparency International (TI) concluded defense offsets are highly susceptible to corrupt activity due to their high transactional value, lack of transparency, and technical nature, and that these risk factors enable companies to bribe government officials in exchange for the creation of offset requirements, award of offset contracts, and theft of offset funds. (10) However, TI's report only scratched the surface of how corruption works in defense offsets.
To clarify how corruption taints offset transactions, this article argues that fraudulently inflated offset valuations, improper sole sourcing, and lack of transparency are the key elements that make defense offsets exploitable for corruption. To prevent and detect offset corruption, the international community and defense industry must both take action to curb abusive offset practices. Specifically, the Organization for Economic Cooperation and Development (OECD) should begin negotiations for a convention to set out basic standards for offset procurements. In addition, defense vendors should heighten their due diligence standards and increase electronic audits of offset documents.
To analyze the problem of defense offset corruption, Part II of this article first describes the corruption risks offsets create, as well as the basics of how offset transactions work. Part III summarizes offset regulations in the two largest defense markets, the United States and European Union, as well as the World Trade Organization's (WTO) offset rules. Part IV discusses criminal statutes that punish bribery and false claims in offset transactions. These statutes include the Foreign Corrupt Practices Act (FCPA), U.K. Bribery Act 2010, and False Claims Act. Part V analyzes how corrupt actors can manipulate offset transactions through valuation, competition, and transparency flaws. Finally, Part VI proposes new anti-corruption initiatives for the OECD and defense industry vendors.
II. DEFENSE OFFSETS AND THEIR CORRUPTION RISKS
Offsets are a complex and arcane aspect of defense trade. Defense offsets are compensation agreements where a defense vendor promises to do specific future business in a country in exchange for the award of a government procurement contract. (11) It is a reciprocal transaction that allows the purchasing government's economy to recoup, or "offset," some of the procured defense item's purchase price. (12) An offset agreement is made between a defense vendor and a purchasing government, but it involves the vendor placing work with a company located in the purchasing country. (13) Vendors and governments agree to offsets within the broader context of negotiating the sale of a major weapon system, usually in the aerospace and communications sectors. (14) During these negotiations, vendors may offer offsets as an inducement, or purchasers may set them as a purchase condition. (15) The business occurring in an offset arrangement is dependent on the successful negotiation of the defense sale. Without the defense sale, the offset transaction either would not occur on the open market, or would occur at a much higher cost. (16) However, without the inducement of an offset arrangement, the main defense sale may also not occur for a particular vendor, due to other defense firms outbidding the losing firm with more lucrative offset deals. (17)
The use of offsets began in 1961, when the United States required West Germany to buy U.S. weapons to offset the economic impact of maintaining U.S. military forces in Germany. (18) However, by the early 1970s, Western European countries began conditioning their purchases of American goods on incentives such as job creation and technology transfer. (19) By the 1980s, offset arrangements were present internationally, and countries such as South Korea asserted high offset demands. As an example, in a heated competition between General Dynamics and McDonnell-Douglas, Korean offset demands escalated from thirty percent of the contract's value to sixty percent. (20) At the present time, offsets are an integral part of negotiations in defense trade. In an average contract, a U.S. vendor agrees to an offset worth 63.5 percent of the price of the defense sales contract. (21)
Offsets, however, are prone to corruption. An offset may be exploited for numerous illegal purposes, including bribes to generate offset requirements, bribes to gain offset business, and bribes to satisfy offset obligations. (22) Additionally, offset parties may submit fraudulent invoices for sham transactions. (23) Offsets are susceptible to corruption due to four main reasons: they offer high-value inducements that are often tangential to the subject of a defense sale, they promote disparate policy goals that make them difficult to monitor, they use complex and opaque rules that frustrate transparency, and they require the use of consultants who are often closely connected to government officials.
A. Questionable Inducements in Competitive Sales
Offsets are vulnerable to corruption because they distribute large sums of money as incentives in highly competitive, negotiated government procurements. Although these procurements involve major weapons systems costing billions of dollars, much of the offset work incentivizing these sales bears no direct relation to the basic defense item. (24) This disconnect between the subject of defense procurements and the subject of defense offsets raises a suspicion that offset incentives contain improper or corrupt inducements.
Defense offsets, like defense procurements as a whole, pose an attractive target for corruption due to their large monetary values. (25) For example, U.S. companies entered into over eleven thousand offset transactions worth more than $56 billion between 1993 and 2010.26 Additionally, offsets constitute a high percentage of the value of defense sales. For example, in February 2012, the Indian government agreed to purchase $20 billion in fighter jets from the French company Dassault, and as part of this deal, Dassault agreed to offset obligations worth half the contract's value. (27)
Another driver of offset corruption is the competitive nature of international defense sales. Purchasing governments exert considerable leverage to extract offset concessions from vendors because defense sales are rare and lucrative. (28) The life cycle of a major weapons system can run up to thirty years, (29) and the profit from these systems' sales have traditionally been high. (30) Moreover, although the defense industry in the United States and European Union has undergone substantial consolidation since the 1990s, there remain enough defense firms internationally to offer fierce competition. (31) For example, the above-mentioned Indian fighter jet procurement initially involved rival offers from Boeing, Lockheed Martin, Dassault, and an EADS/BAE/Alenia Aeronautica consortium. (32) In such an environment, offerors are under considerable pressure to outbid their rivals' offset proposals. (33)
Another factor motivating offset corruption is that they have been a key deciding factor in past defense procurements. The offset laws of countries such as Poland, Hungary, Greece, and Portugal make offsets an award criterion in defense procurements. (34) These laws make offset only one of several criteria, (35) but even if offsets have relatively minor weight as a criterion, they can still be pivotal in deciding who wins a procurement award. For example, when Poland purchased the F-16 in 2002, the bidders' offset proposals accounted for only fifteen points out of a total of one hundred. (36) However, because other award criteria, such as price and operational considerations, were closely matched, offsets became a key deciding factor in the procurement. (37) Offsets frequently prove to be a crucial deciding factor because, in comparison to a defense item's capabilities and price, an offset package is far more flexible and under a vendor's control. (38) Offsets allow defense vendors to fashion creative proposals to win procurement awards, (39) and this quality has led offset advocates to justify them as a persuasive "marketing tool" for defense vendors. (40) If a vendor is unethical, though, the offset marketing may also include bribery. (41)
High-level negotiations are still another factor contributing to offsets' vulnerability to corruption. Traditionally, negotiations have been disfavored in government procurements due to the perception that they are vulnerable to unjust favoritism, collusion, and fraud, as well as being a means of enabling covert bribe payments. (42) In defense offsets, this traditional unease about negotiations has merit (43) because local politicians in the past have inserted themselves into offset negotiations. (44) During the Polish F-16 negotiations, for example, the Polish offices of the President and Prime Minister interjected themselves into negotiations to promote favorite offset projects and to seek assurances their political districts would be offset beneficiaries. (45) This situation is a textbook example of a transaction with high corruption risk. (46) This risk is further exacerbated by the fact that many top purchasers of defense equipment and offsets are located in regions dealing with significant corruption. (47)
Finally, offsets are vulnerable to corruption because they often involve transactions unrelated to the work of the main defense sale. According to the Department of Commerce, forty percent of offsets, as measured by actual value, are "direct" offsets, meaning they relate directly to the defense article or service purchased. (48) Direct offsets usually require the manufacture of a weapon or its components in the purchaser's country, and are concentrated in aerospace-related industries. (49) In contrast, fifty-nine percent of offsets, as measured by actual value, are "indirect" offsets, meaning they are unrelated to the defense article or service purchased. (50) Indirect offsets are diffused among a wide variety of industries such as motor vehicle parts, mining machinery, industrial chemicals, machine tools, wine and food products, and computer software. (51) The categorization of an offset as direct or indirect can be difficult, especially if it involves technology such as aerospace software that may be applied to both civilian and military sectors. (52) One European study estimated that twenty-five percent of European defense offset transactions are completely unrelated to the defense industry. (53) For example, in the 1980s, the F-18 sale to Spain involved indirect offsets promoting tourism, (54) and in the 1990s, Greek indirect offsets financed investments in medical diagnostics, sportswear manufacture, and financial services software. (55) Such deals prompt questions about whether they serve the purchasing government's interests, or ulterior, improper interests. (56)
B. Disparate Policy Goals
Another reason offsets are susceptible to corruption is their disparate policy goals. Purchasing governments use offsets to promote multiple national security and economic development interests, and this combination of disparate policy goals can make it difficult for third parties to discern a particular offset's purpose, or monitor its success. (57)
The primary reason that purchasing governments require defense offsets is to mitigate national security concerns. When a government purchases a foreign weapon, typically it is because its domestic defense industries are incapable of manufacturing the weapon on their own. (58) However, if a purchasing government buys a superior foreign weapon, this introduces the risk that an external circumstance such as war, embargo, alliance shifts , or a supply chain disruption could endanger the purchasing government's security of weapon supply. (59) Additionally, a purchasing government could be placed at risk if a foreign vendor's government deprives the purchaser of control over the weapon's technology. (60) To mitigate these risks, purchasing governments require foreign vendors to provide offsets that produce a specified number of weapon components within the purchasing country, and transfer weapon technology to domestic companies. (61)
Governments do not just mandate offsets for national security concerns, they also mandate them for political and economic reasons. (62) By mandating direct offset work to domestic companies, governments ensure domestic defense industries maintain work, and domestic workers stay employed. (63) Additionally, governments require indirect offsets to assist civilian industries through the introduction of fresh capital flows, new technology, and new markets. (64) Overall, offsets allow governments to stimulate industrial development with increased government procurement spending. (65)
Purchasing governments demand offsets to promote various economic and national security policies, and use offsets not only to buy weapons, but also to procure a comprehensive bundle of goods and services that enhance the overall national welfare. (66) However, offsets' multiple goals make it difficult for outside parties such as academians, good government advocates, and ordinary citizens to determine whether a particular offset's goal is national security, economic development, or a combination of both. (67) Without clarity in an offset's policy goal, it becomes difficult for outside parties to measure the offset's success and legitimacy. (68)
C. Complex and Opaque Transactions
A fundamental reason offsets are vulnerable to corruption is because they combine a highly valuable asset with a lack of transparency. (69) Offsets, like defense procurements in general, lack transparency because their negotiation and award are shielded from public scrutiny based on alleged national security concerns. (70) Additionally, because offsets engage in unique, complex transactions and accounting practices, they are difficult to monitor. (71) As a result, parties to an offset may feel emboldened to exploit offsets for corrupt motives. (72)
Defense procurements are subject to secrecy because they involve purchasing items containing national security sensitivity, classified information, and protected commercial information. (73) No government engaging in offsets publishes the terms of individual offset arrangements. (74) Instead, governments publish broad trends about offsets. (75) As a result, offset data is scarce and monitoring offsets is difficult. (76) Moreover, it is difficult to decipher the reported offset information due to offsets' unique terminology, and complex transactions and accounting rules.
First, offsets engage in a complex web of transactions with their own terminology. These transactions fit into three categories: transfers of technology or financing, local content requirements, and countertrade. (77) Because a successful offset package combines several types of transactions, (78) it is important to understand how these types fit together.
Transfers of technology or financing ("transfers") require a vendor to provide an additional product to a purchaser in order to win the main defense sale. (79) These additional products include transferring technology to a company domestic to the purchasing country; (80) training a domestic company on how to produce, maintain, or engineer a product; (81) or lending credit assistance to finance an offset. (82) Transfers provide the technology, practical experience, and financing to start up an offset. The most prevalent type of transfer, technology transfer, made up $10.4 billion (or eighteen percent) of U.S. defense firm offset transactions between 1993 and 2010.83
A local content requirement mandates a vendor produce an agreed-upon portion of the contract's value in the purchasing country. (84) For example, a local content requirement may mandate a domestic company of the purchasing country manufacture a fighter aircraft's landing gear. (85) Within local content requirements, there are four types of trade: subcontracting, (86) licensed production, (87) co-production, (88) and investment. (89) The main distinction between these forms is the transactional format used to package local production. The most prevalent type of local content requirement, subcontracting, made up $ 11.9 billion (or twenty-one percent) of U.S. defense firm offset transactions between 1993 and 2010. (90)
Countertrade is a reciprocal purchase of goods and services between a defense vendor and purchasing government. (91) Countertrade consists of three specialized types of trade: barter, (92) counter-purchase, (93) and buy-back. (94) A typical barter transaction requires a purchasing government to pay for defense items with raw materials, such as when Iraq paid France for military supplies with oil. (95) A counter-purchase requires a vendor to market and sell manufactured material produced in the purchasing country, such as when a U.S. defense vendor marketed Finnish papermaking machinery in the U.S. (96) Finally, buy-back requires a vendor to invest in a physical plant in the purchasing country, and then buy back a certain portion of the output produced there. (97) The most prevalent type of countertrade, counter-purchase, made up $20.6 billion (or thirty-six percent) of U.S. defense firm offset transactions between 1993 and 2010. (98)
Second, in addition to unique terminology, unique accounting practices add an extra layer of complexity to offset transactions. These accounting practices affect both the selection and discharge of a procurement. During the selection phase, an offset proposal may be scored in terms of its cost, or an estimated value based on speculative, indefinite, or arbitrary formulas." During the discharge phase, an offset may be satisfied by a vendor earning offset credit, and not by completing performance. (99) Both of these practices are made possible by five unique offset accounting practices.
The first accounting practice is that offset agreements specify the level of offset activity required by expressing it as a percentage of the contract's purchase price. (101) For example, a purchasing government may require a beginning bid for a defense contract to contain at least thirty percent of its value as offset activity. (102) Many countries require an offset's value to be one hundred percent or more of a contract's purchase price. (103)
For an offset to be worth more than the contract it is attached to, the second oddity of offset accounting must exist. Purchasing governments must use multipliers to grant additional offset credit to activities they wish to encourage. (104) A multiplier is a number that is compounded with the actual value of an offset transaction in order to calculate a higher or lower credit value. (105) A multiplier may increase an activity's credit value by a factor of two, ten, or even thirty. (106) Offset guidelines will state what multiplier a government will assign to specific types of offset activity. (107) Some offset policies allow government officials to assign a range of multipliers to offset activity. For example, the value for a research and development proposal may be multiplied anywhere from one hundred to two hundred percent of its actual value in a Middle Eastern country, and may be multiplied by a factor of just ten to thirty in a European country. (108)
The third accounting practice is to base an offset's credit value at award on cost, or on a formula devised by the purchaser. (109) Valuing an offset at cost may be inappropriate because, for example, a defense vendor transferring its technology to a local company may demand the purchasing government compensate it for future royalties generated by the transfer. (110) However, valuation is a major weak point in offsets because market data may be unavailable for the offset's subject, or because there may be imperfect data about the production abilities of an offset recipient. (111) To value future royalties, governments fix a value in reference to projected production, sales, or profits, but such benefits may fail to materialize during performance. (112)
The fourth accounting practice is to require a vendor to earn a specified number of offset credits which are earned by engaging in activities listed in the offset agreement. (113) For example, to earn the required number of offset credits, a vendor must sell a certain number of products in countertrade. (114) To obtain discharge, a vendor must present its offset activity to an official in the purchasing government who determines whether the activity actually earned the required number of credits. (115)
The final accounting practice is to allow a vendor to "bank" excess credits earned or to sell excess credits to other vendors. (116) For example, if a vendor sells more products in countertrade than required, it can store this extra value as banked offset credits. Banked offset credits mitigate the risk of defaulting on an offset obligation because in lieu of default, a vendor may cash in or purchase banked offset credits. (117)
The potential for these accounting practices to frustrate transparency and invite corruption is apparent in a South African offset arrangement connected to the purchase of German submarines. In this arrangement, the offset requirement was in excess of four hundred percent of the contract price. (118) It is unclear how an offset, which is supposed to recoup part of the purchase price, (119) could be worth four times the value of the item purchased. Such a valuation seems disingenuous, but it is the current state of affairs in offset practice.
D. Third Party Agents
The hire of third party agents and consultants is the final factor making offsets vulnerable to corruption. Foreign agents and consultants create a significant corruption risk due to their personal ties to high-ranking officials in their countries' defense ministries, and due to their own compromised ethical standards. (120) This risk is evidenced by their involvement in more than ninety percent of reported FCPA cases. (121) Yet despite this risk, many vendors hire third parties to develop and deliver offset packages.
Defense vendors hire agents and consultants mainly to develop and deliver indirect offset projects that are beyond the vendors' areas of expertise. (122) To manage direct offset packages, many defense vendors establish separate in-house operations. (123) In the offer stage, an offset agent assists a vendor by developing multiple indirect offset proposals that correlate to the vendor's strengths and the purchasing country's needs. (124) To develop these proposals, agents employ think tanks consisting of high level ex-government, military, and industry leaders, as well as field representatives and proposal evaluators. (125) In the performance stage, an agent may perform an offset on behalf of a vendor. (126) In such a capacity, offset agents may purchase and resell offset goods like a trading company, or market offset goods for purchase by other parties. (127) In exchange for their services, agents may charge a fee calculated as a fixed price per unit of goods sold, or as a percentage of the offset item's purchase price. (128)
The corruption risk posed by agents is present in every offset stage. During the offer stage, the potential political power of think tank members may create conflicts of interest that compromise an agent's offset proposals. (129) There is also a danger that agents may place the pet projects of government officials into their proposals without properly vetting them. (130) In the performance stage, agents may sell offset goods with the aid of corrupt payments, either with or without the knowledge of the defense vendor. (131) Offset agents being paid on commission exacerbate these risks. (132)
Despite concerns about agents' corruption, the burden of creating and satisfying offset proposals is so substantial that defense vendors and governmental authorities now accept offset proposals sold to them by third party companies. (133) These proposals, called "reverse piggyback offsets," originate from companies entirely independent of the defense vendor and purchasing government. (134) Accepting a reverse piggyback offset is even riskier than accepting normal agent proposals, yet the pressure or desperation to create and fulfill offsets has made it possible for such risky offset practices to exist. (135)
III. MAJOR INTERNATIONAL OFFSET REGULATIONS
Although international trade in defense offsets generates billions of dollars in revenue, a remarkable aspect of offset trade is how lightly it is regulated. (136) Defense procurement offsets face no substantial WTO regulation, which leaves purchasing and exporting countries with a free hand. This has led to a divide in how governments regulate offsets. The European Union attempting to restrict them, while the United States has left them largely unregulated.
A. Agreement on Government Procurement
The WTO's Agreement on Government Procurement (GPA) (137) expressly prohibits acceding countries from imposing, seeking, or considering offsets. (138) However, the GPA's offset prohibition does not stop GPA members from demanding offsets in their defense procurements. (139) This dissonance occurs because the GPA's offset prohibition contains two exceptions utilized for defense procurements.
First, GPA Article XXIII states its terms do not apply either to procurements for "arms, ammunition or war materials" or to procurements "indispensable for national security," if the acceding nation considers either type of procurement "necessary for the protection of its essential security interests." (140)
Second, the GPA covers a defense ministry's procurement of non-armament items only if the country has negotiated an inclusion for them, as reflected in that country's individual GPA annex. (141) The terms of a country's annex can exclude GPA coverage of a defense ministry purchase if the purchase falls below a certain dollar threshold, or if the purchase is made by an agency within the defense ministry that is explicitly excluded from GPA coverage. (142) Additionally, a defense ministry purchase can be excluded if a country's annex states such a purchase is covered only if its subject is specifically included on a list in the annex. (143) In this situation, a country may strategically fail to list certain types of goods or services. (144)
Both of these exceptions work together to exclude defense offsets from GPA restrictions. For example, Japanese defense aircraft procurements have required an indirect offset for automobile parts manufacturing. (145) The GPA's offset prohibition does not apply for two reasons. First, a defense ministry is purchasing the offset through an armament procurement. (146) Second, the offset is for an automotive product, which is not listed as a covered defense ministry item in Japan's GPA Annex. (147) Therefore, Japan has successfully and legally required automotive defense offsets.
B. European Union Regulations
The European Union disfavors offsets and has initiated two recent efforts to curb their use: a voluntary Code of Conduct on Offsets, and an E.U. Defense Procurement Directive. However, like the WTO, the European Union's efforts do not effectively regulate defense offsets.
E.U. Member States control their own defense procurements, and as a result, E.U. defense procurements have historically been fragmented along national lines. (148) Similarly, the European Union has fragmented offset rules, with about half the member states requiring offsets through laws, decrees, or ministerial regulations. (149) Although the European Defence Agency (EDA) is not in favor of defense offsets, (150) the European Union has not banned offsets outright due to their politically sensitive nature. (151)
Instead of banning offsets, in 2011 the European Union promulgated a voluntary Code of Conduct which recommends basic offset agreement principles. (152) These principles include clearly stipulating offset requirements in contract notices, minimizing the weight of offsets as award criteria, and not having offset valuation exceed the value of the procurement contract. (153) The goal of these principles is to mitigate the adverse effects of offsets. (154) However, it has not appreciably affected E.U. offset practices because it has no enforcement mechanism. (155)
The second E.U. effort to restrict offsets is the 2009 defense procurement regulation, Directive 2009/81/EC ("Directive"). (156) Like the GPA, the Directive states a general rule that contracting authorities must treat all bidders for defense procurements in a non-discriminatory manner. (157) This rule probably prohibits discrimination in defense offsets, even though the Directive does not mention offsets. (158) Although the Directive's rules apply to all military equipment procurements(i.e., "equipment specifically designed or adapted for military purposes and intended for use as an arm, munitions or war material"), (159) its terms do not restrict offset practice in a meaningful way. Specifically, the Directive's terms do not cover cooperative development program procurements; (160) international agreements or arrangements, such as Memoranda of Understanding (MOUs); (161) and government-to-government contracts. (162) These exceptions swallow the Directive's rule against non-discrimination, because they exclude all the current E.U. defense procurement mechanisms. Using aircraft as an example, E.U. Member States currently use collaborative procurement for the Eurofighter Typhoon, (163) an MOU for the F-35, (164) and a government-to-government sale for the F-16.165 As a result, the Directive's anti-discrimination rules are toothless for offsets connected to these procurements.
C. United States Regulations
In contrast with the European Union, the United States has a "hands off' approach and does not attempt to directly regulate offsets. (166) The United States maintains that deciding whether to engage in offsets, and the responsibility for negotiating and implementing those offsets, resides with the parties involved. (167) However, the United States does maintain indirect control over offset agreements entered into by U.S. companies. (168) Specifically, the United States restricts offsets through its rules for Direct Commercial Sales (DCS) and Foreign Military Sales (FMS). However, DCS and FMS restrictions are broad and unsophisticated.
When a U.S. vendor sells defense articles, services, or technical data to a foreign government, it must do so through the DCS or FMS programs. (169) DCS are commercial exports to a foreign government authorized under the Arms Export Control Act. (170) Before export, a defense vendor must obtain an export license per the International Traffic in Arms Regulations. (171) DCS are negotiated directly between a defense vendor and purchasing government, and offset provisions may be part of the main contract or a separate agreement. (172) The United States exerts control over potential DCS offsets by not granting an export license for technology requested by a purchasing government. As a result, around eighty-five percent of U.S. offsets are satisfied with technology at least ten years old. (173)
FMS are government-to-government agreements where the Department of Defense (DOD) sells arms to foreign governments. (174) Under FMS, defense vendors do not sell directly to the purchasing governments and do not obtain an export license. (175) Instead, the U.S. Government agrees to sell the foreign government the defense item. In turn, the U.S. Government contracts separately with the vendor under the Federal Acquisition Regulation (FAR) to purchase the item for resale to the foreign government. (176)
Offsets become part of FMS exports when a purchasing government first conducts its own procurement competition among several nations' vendors. In this process, a U.S. vendor submits an offset proposal as part of its bid, the purchasing government picks the U.S. vendor's bid, and the purchasing government then approaches the U.S. government to request a sole-source FMS award to its chosen U.S. vendor. (177)
FMS occurs through a contract between the U.S. Government and purchasing government called a Letter of Offer and Acceptance (LOA), but an FMS offset occurs in a separate agreement between the defense vendor and purchasing government. (178) This separate offset arrangement exists because of the U.S. Government's policy to not be a party to offset agreements. (179) However, to recover its offset costs, the defense vendor increases the LOA's sales price. (180) Specifically, the vendor increases the line item unit price of the defense item, and does not account for offset costs separately. (181) As a result, the defense vendor bills the U.S. Government for both the defense item and offset, and the U.S. Government recovers these costs from the purchasing government. (182)
The U.S. Government's regulation of FMS offsets is indirect and broad. Nevertheless, it places some restraint on offset subcontracting and accounting practices. For subcontracting, a DOD contracting officer will honor a purchasing government's request to place a subcontract with a particular firm only if there is full and open competition, or if the LOA specifically requires a product be obtained from this firm. (183) To justify a sole source request, a purchasing government must provide written rationale to U.S. contracting authorities demonstrating how the sole source is based on the purchasing government's objective needs, and how excluding other sources is not arbitrary, capricious, or discriminatory. (184) For accounting practices, because DOD assumes responsibility for a fair price being paid for an FMS acquisition, a DOD contracting officer must determine whether a vendor's offset costs are reasonable and allocable. (185) Such a determination is usually made by a contract officer's review of an offset's projected labor, material, and overhead costs. (186) This review of offset costs, while not perfect, provides some deterrent to placing illegal charges within an LOA.
IV. MAJOR INTERNATIONAL ANTI-CORRUPTION OFFENSES
Although there is no effective international regulation of offsets, there are several criminal statutes in multiple jurisdictions which punish corrupt conduct in an offset agreement. The most prominent statutes are the U.S. Foreign Corrupt Practices Act (FCPA), (187) the U.K. Bribery Act 2010 (Bribery Act), (188) and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention). (189) These laws take different approaches to regulating international corruption, but when their disparate provisions are combined, they create four offenses covering defense offset corruption: bribery of a foreign official, (190) commercial bribery, (191) recordkeeping and internal control violations, (192) and failure of a commercial organization to prevent bribery. (193) In addition, because approximately forty percent of U.S. defense export sales (and their accompanying offsets) occur through FMS, (194) U.S. defense vendors face liability under the False Claims Act (195) for corrupt offset transactions.
A. Bribery of a Foreign Official
The FCPA, Bribery Act, and Anti-Bribery Convention each prohibit individuals and corporations from bribing foreign officials. (196) Although these laws generally track with each other in their elements, (197) each uses different phraseology and approaches. (198) More importantly, all three laws create flexible frameworks for punishing bribes of foreign officials, no matter what mechanism a party uses to transfer the bribe.
The general principles criminalizing bribery of a foreign official were created by the Anti-Bribery Convention, which is an international agreement that requires signatory countries to enact laws that implement its anti-bribery provisions. (199) The Anti-Bribery Convention entered into force in 1999. By 2012, forty countries had ratified it. (200) The Anti-Bribery Convention makes it illegal for any person to offer, promise, or give an undue payment to a foreign public official in order to obtain or retain business, or to receive any other improper advantage. (201) An undue payment is one made intentionally in order to induce a foreign official to act or to refrain from acting in relation to the performance of his official duties. (202) Obtaining or retaining business occurs if a party obtains a government contract. An improper advantage exists where a party makes a payment to receive something it is not clearly entitled to, such as a permit. (203) An illegal payment may be made either to a foreign official or another person or entity affiliated with the official, such as a family member or business. (204) Likewise, liability for the bribing party exists for payments that it makes directly, as well as for payments made indirectly through intermediaries. (205)
For defense vendors, the provisions of the Anti-Bribery Convention, FCPA, and Bribery Act pose three pressing problems. First, these laws' punishment of indirect payments make defense vendors liable for illegal payments made by sales or marketing agents, consultants, and joint venture partners. (206) Second, the definition of an "improper purpose" is broad enough to encompass bribery for the award of offset credit. Because offset credit relieves a defense vendor of financial liability to a purchasing government, (207) the illegal award of such credit would create an improper advantage for a bribing party. Finally, a "foreign official" may include not only employees of traditional foreign government agencies, but also employees of a state-owned or state-controlled entity. (208) Because European governments frequently grant offsets to state-owned defense contractors, (209) vendors must confirm the status of foreign companies with whom they contract.
B. Commercial Bribery
Several federal and international laws prohibit commercial bribery in international transactions. (210) The Bribery Act prohibits commercial bribery when a financial advantage induces or rewards private persons for improperly performing functions in the scope of their employment or business. (211) Additionally, the U.S. Department of Justice (DOJ) may prosecute commercial bribery under the Travel Act if a bribing party used interstate travel or commerce to distribute the proceeds of bribery, or under the Federal Wire Fraud Act if a bribing party used transmissions in interstate commerce to promote a fraudulent scheme. (212) Although such prosecutions are rare, (213) defense vendors cannot ignore the risk of prosecution if, for example, a vendor's agent pays a subcontractor to generate forged invoices to earn offset credit. (214)
C. Recordkeeping and Internal Control Violations
In addition to prohibiting a bribe itself, international law criminalizes the maintaining of books and records that conceal or mischaracterize bribe transactions. The FCPA has two rules applicable to issuers of securities (215) in the United States: a requirement to make and keep accurate, reasonably detailed books and records, and a requirement to maintain an adequate system of internal accounting controls. (216) Although other countries impose similar duties to maintain adequate accounting records, (217) the FCPA is notable for its increasing number of enforcement actions. (218)
An FCPA recordkeeping violation occurs if an issuer fails to make and keep books, records, and accounts in reasonable detail that accurately and fairly reflect the transactions and dispositions of the issuer's assets. (219) The recordkeeping rule essentially requires a company paying a bribe to record the transaction as a bribe, (220) and not conceal the payment as another type of transaction such as a consultant fee or marketing expense. (221) An FCPA internal control violation occurs if an issuer fails to devise and maintain a system of internal accounting controls sufficient to meet objectives such as recording transactions in a way that permits asset accountability. (222)
D. Failure of a Commercial Organization to Prevent Bribery
The Bribery Act created a new offense in 2011 when it made businesses liable for failing to prevent persons associated with them from committing bribery. (223) This prohibition has been compared to the FCPA's recordkeeping and internal control provisions, because both the U.K. and U.S. laws require companies to operate internal anti-corruption programs for compliance. (224) However, the Bribery Act's provisions are broader than the FCPA's due to broader jurisdictional and liability standards.
A commercial organization fails to prevent bribery if a person associated with it bribes another person intending to retain business, or obtain or retain an advantage, for the commercial organization. (225) An "associated person" is anyone who performs services for or on behalf of the commercial organization. (226) The Bribery Act states an employee, agent, or subsidiary meets the definition of associated person, but contractors, suppliers, and joint venture partners may also fall within the definition. (227) Additionally, the person offering the bribe does not have to be prosecuted in order for the commercial organization to be held liable, and the bribe itself may be offered or given to either a commercial or governmental entity. (228)
The broad jurisdiction of the failure to prevent bribery offense is remarkable. The FCPA's recordkeeping and internal control provisions apply only to issuers of U.S. securities. However, the Bribery Act's failure to prevent bribery offense applies to any incorporated body or partnership which carries on a business, or part of a business, in any part of the United Kingdom. (229) The U.K. Ministry of Justice has stated merely listing securities in the United Kingdom, or the existence of a U.K. subsidiary, does not automatically mean a company is carrying on business in the United Kingdom. Additionally, the SFO Director has stated that "carrying on business" means "economic engagement" with the United Kingdom, such as trading, raising finance, carrying out corporate functions, or dealing with numerous stakeholders. (230) However, because the United Kingdom is one of the seven largest defense markets in the world, (231) it is likely a major defense vendor would conduct enough business in the United Kingdom to trigger liability under the Bribery Act.
E. False Claims In Foreign Military Sales
The FCA makes it illegal to knowingly present, or cause to be presented, a false or fraudulent claim for payment or approval by the U.S. government. (232) In United States ex rel. Campbell, the District Court for the District of Maryland held that invoices processed through FMS may create FCA liability if fraudulent. (233) Specifically, the court held that FMS invoices submitted to DOD met the FCA definition of a claim for payment. (234) Additionally, the court held that even though FMS items are resold to a foreign government, and the U.S. government is reimbursed for all FMS expenses, this does not allow a defense vendor to escape FCA liability. (235) A vendor's fraudulent claim establishes FCA liability, and a subsequent government-to-government sale does not excuse or eliminate such liability. (236) Therefore, a false invoice, record, or statement from a subcontractor material to the prime vendor's invoice could result in FCA liability. (237) The FCA requires no proof of specific intent to defraud, but only actual knowledge of information, an act in deliberate ignorance of the truth or falsity of information, or reckless disregard of the truth or falsity of information. (238)
V. TRACING CORRUPTION PATHWAYS IN OFFSET TRANSACTIONS
Offset corruption risks exist at several points in a transaction. In the formation stage, a bribe may skew an offset's valuation as an award criterion, generate an unnecessary offset requirement, or determine a sole source offset award. (239) In the performance stage, an offset may operate as a sham transaction to siphon funds or may prompt a bribe in exchange for fraudulent offset credit. (240) These corrupt practices succeed through the exploitation of an offset's award criteria, valuation mechanisms, and sole sourcing provisions, and by utilizing non-transparent procurement processes.
A. Formation of Offset Proposals
During the negotiation and award of a defense procurement, a party may bribe a foreign official in order to improperly award a defense procurement to a particular foreign vendor, or to improperly award an offset subcontract to a particular domestic contractor. (241) To make a corrupt award seem legitimate, a foreign official may manipulate an offset's valuation and sole sourcing rules.
To bribe a foreign official, a party will most frequently arrange for an electronic transfer of money from an intermediary into a corrupt official's bank account. (242) Alternately, a party may deliver its bribe through tangible assets such as cash, gifts, travel, and entertainment. (243) Bribers often use an intermediary to deliver a bribe, such as an agent, consultant, or an official's family member, in order to conceal their own identities. (244)
Some observers, including former Senator Russell Feingold, have argued that defense offsets in and of themselves are a bribe. (245) However, it is important to distinguish between an offset serving as a bribe, versus an offset as an object for a bribe. A bribe exists if a person offers an undue payment to a foreign official in order to obtain or retain business. (246) For example, in South Africa a foreign vendor awarded an offset contract to a company that later, allegedly, issued some free company shares to the South African defense minister. (247) In this instance, the company's stock gift to the defense minister was a bribe. (248) However, the offset itself was not a bribe; instead, it was the business the bribe sought to obtain. Antibribery laws do not outlaw the operation of legitimate business, and offsets, despite their nature as contractual incentives, deliver products and services that benefit the purchasing government. (249) Offsets do not offer a unique way to exchange undue payments in a bribe transaction; instead, they are unusual in how they exploit procurement mechanisms to unlawfully award a contract. In the contract formation process, procurement valuation and subcontracting are exploited to reward bribery.
In an improper valuation scheme, a government official improperly inflates an offset's valuation to award a defense procurement to a corrupt vendor as a payback for a bribe. (250) For this scheme to work, an offset must be an award criterion, and government officials must abuse their discretion in valuing offset proposals. (251)
Offset valuation is prone to improper inflation because offset cost figures, even within legitimate deals, are complicated by several risk factors. First, valuation involves the use of proprietary source selection data, so valuation information cannot be disclosed to outside parties for public oversight. (252) Second, because offsets allocate direct offset work to domestic contractors which are not as efficient as their international competitors, offsets require vendors to add a cost premium to a defense acquisition. (253) This cost premium depends on production costs (e.g., an item's price and marketability in countertrade), as well as transaction costs (e.g., exchange rate, inflation, and default risks). (254) Third, offset valuation may be complicated by the unavailability of market data for the subject of an offset, or by a lack of reliable data on how successfully an offset recipient will fulfill its contract. (255) Fourth, valuing an offset may be speculative if it requires a defense vendor to develop new business for an offset recipient by investing money, skill, or technology into that firm. The offset may condition the offset's discharge on the investment's success, yet such an outcome is unknowable at the time of offset formation. (256) Fifth, and most crucially, offset valuation may be improperly inflated if purchasing governments do not value an offset on cost, but instead on complex formulas. (257) For example, to value technology transfer, offset parties may utilize the item's reproduction cost, replacement cost, projected production run, estimated income stream, or anticipated future profits. (258)
These multiple risk factors make valuing an offset highly speculative. For example, when the consortium producing the Eurofighter Typhoon bid on a Norwegian fighter jet procurement in 1999, several billion dollars separated the offset valuations calculated by the defense vendor (26.7 billion Norwegian krone, or $4.4 billion), Norwegian industry (16 billion Norwegian krone, or $2.6 billion), and the Norwegian defense ministry (4.5 billion Norwegian krone, or $740 million). (259) In this instance, the purchasing government acted as a brake on optimistic offset valuations. However, with a corrupt government, the offset valuations in the Norwegian example could be turned on their head, with a corrupt official overselling an offset's value in exchange for a bribe.
Unfortunately, such an allegation of corrupt offset manipulation was raised in the procurement of a training jet in South Africa. (260) In a three-way competition, a British bid allegedly received the lowest score on both technical and cost criteria, but when the South African Defense Ministry factored financing and a substantial offset proposal into the bid, they ranked the British proposal as the most advantageous. (261) When the South African Department of Trade and Industry (SADTI) conducted its own analysis of the British offset's valuation, SADTI disputed the offset valuation, stating the value was "grossly inflated" from $245 million to $1.6 billion. (262) Nevertheless, the British bid won the South African contract. (263) Anti-corruption advocates allege that bribery caused the South African offsets valuation to increase by a factor of six. (264)
Corrupt officials may also exploit offset subcontracting rules to reward a bribe. Specifically, a potential offset recipient may bribe a government official to direct the prime vendor to award an offset to the bribing party. (265) Such a bribe could occur in two parts of the procurement process: the creation of offset proposals where an official could create an offset to benefit a particular local company, and the award of offset subcontracts. (266)
In offset negotiations, a bribe to create an improper offset could be obscured among the hundreds of offset proposals that are typically reviewed for a final offset package. (267) Moreover, an improperly influenced offset proposal could enter into discussions through the input of third parties pitching a reverse piggyback offset to a vendor's offset agents. (268) By inserting an offset proposal through a third party, a corrupt government official could effectively mask his or her involvement in the deal.
In the award phase, government officials could direct a defense vendor to award an offset to a particular subcontractor on dubious national security or industrial development grounds. For example, an Asian government that purchased an airplane through FMS in the 1990s specified that it would select the companies which would manufacture the airframe in accordance with an offset. (269) The country justified directed award by stating all four selected aerospace subcontractors needed to achieve a proportionate share of subcontracting work. (270) In defense procurement, such apportionments are often made in the interest of national security so more than one defense vendor remains capable of manufacturing a key weapon component. (271) However, if a directed award is tainted by corruption, the rationale may actually legitimize an improper offset award. (272)
B. Award of Offset Credit
In the performance phase of an offset, there are two ways for corruption to affect an offset transaction. First, an offset can be a sham transaction used to siphon funds to government officials. (273) Second, a vendor may offer a bribe to improperly receive offset credit to discharge an offset obligation. (274)
In sham transactions, an offset may be used to generate false claims against a purchasing government in order to siphon funds to corrupt government officials and commercial parties. A scheme for sham transactions may originate as early as the negotiation of an offset package; for example, corrupt officials and companies may agree to generate sham transactions to reimburse the vendor for its bribery costs. (275) Bribery typically occurs over many years, and corrupt officials collect bribes throughout the course of a business relationship. (276) Therefore, if a vendor can obtain a corrupt official's agreement, a vendor may choose to file false claims to shift the bribery burden onto the purchasing government. This is illustrated by the alleged bribery that occurred between BAE and corrupt Saudi officials. (277) The initial bribes in BAE's Saudi contracts are estimated to be between 300 [pounds sterling] and 600 million [pounds sterling]($460 million and $921 million), but the total amount of bribery over the course of the twenty-year Saudi contracts are estimated to be over 6 billion [pounds sterling] ($9.7 billion). (278) Throughout the duration of its Saudi contracts, BAE allegedly bribed Saudi officials through false commissions and hospitality payments, (279) which it would falsely record as "marketing services" or "accommodation, services and support for overseas visitors." (280) In addition, BAE allegedly hid bribes in inflated bills from Saudi subcontractors. (281) To obtain reimbursement for its bribes, BAE allegedly charged its mischaracterized expenses to the U.K. Ministry of Defense, which would then seek reimbursement from the Saudi government, as is done in an FMS government-to-government contract. (282)
A second way for offsets to serve as a basis for corruption is for a defense vendor to offer a bribe in order to discharge an offset obligation. (283) Such a corrupt payment may be offered as a bribe to a commercial entity to obtain fraudulent offset documentation, (284) to a government official to grant unearned offset credits, (285) or in response to a government official's extortion. (286)
A commercial bribe for false offset documentation could occur either as a bribe to obtain false invoices, or a bribe to obtain fraudulently banked offset credits. (287) Alternately, a vendor may bribe a government official to receive unearned offset credit, (288) achieved through manipulating offset valuation formulas or giving credit for non-offset work. For example, in South Africa, a Swedish company received an indirect offset to upgrade a spa in Port Elizabeth, and to market travel to this spa to Swedish tourists. (289) The cost of the vendor's investment was $3 million, but the Swedish vendor allegedly claimed $218 million in offset credits because the offset allowed it to receive $3,830 in credit for each Swedish tourist traveling anywhere in South Africa, not just Port Elizabeth. (290) During the offset performance period, South Africa hosted the World Cup, so the Swedish vendor potentially received credit for every Swedish tourist in attendance, many of whom likely never visited the offset's spa. (291)
Finally, government officials may extort a bribe by manipulating offset valuation tools to create leverage. Over the last fifteen years, many countries have required vendors to deliver offsets valued at over one hundred percent of the original contract's purchase price. (292) Such valuations are created with the help of offset multipliers. (293) If a multiplier is used in a vendor's favor, it lessens the offset's cost burden. (294) However, a denial of credit for an offset with multipliers could also create pressure for a bribe. This is especially true if an offset has criteria which are difficult to satisfy, or if there are no alternate businesses with which to satisfy an offset. (295) If an offset agreement has penalty clauses, (296) a corrupt official may also leverage them for bribes. Although some countries allow vendors to accumulate and trade banked offset credits, (297) this practice does nothing to check offset officials' discretion in valuing and granting offset credits, and does not bring transparency to offset transactions. (298) Governments must significantly reform their national offset rules to prevent corrupt exploitation of offset mechanisms.
VI. REDUCING THE RISK OF DEFENSE OFFSET CORRUPTION
To deter and detect corruption throughout an offset's lifecycle, governments and defense vendors must undertake comprehensive reform measures. Specifically, the OECD should create an international convention defining basic standards for offset transparency, valuation, and competition. Additionally, defense vendors should heighten due diligence verification standards and increase the use of electronic audits.
A. Proposed OECD Convention on Offsets
To combat corruption and improve offset practice in general, the international community should establish minimum standards for offset regulation and management. Although past international efforts to regulate offsets have failed, (299) a current discussion of offset best practices is likely to bear fruit because in May 2011, the E.U.'s Code of Conduct on Offsets established a baseline of consensus among most OECD member states about offset management. (300) Specifically, the Code of Conduct requires member states to publish more information about their offset policies, practices, and existing offset commitments, and to clarify their offset requirements in contract solicitations and subcontract awards. (301) Using the Code of Conduct as a foundation, the OECD should create higher standards for international offset practice in the areas of transparency, offset valuation, and award of offset contracts.
1. Transparency Proposals
The Code of Conduct's transparency rules create a baseline for the OECD to initiate discussions for improved offset transparency. The Code of Conduct requires Member States to provide the European Defence Agency with information on their national offset practices and underpinning policies, and to disclose all offset commitments in effect since the Code of Conduct's implementation. (302) In addition, the Code of Conduct requires contract solicitations to clearly stipulate offset requirements and to make clear if offset is an award factor. (303) Although these rules provide some clarity to offset award and offset practices in general, the international community should do more to give contractors and third parties better information on the offset decision-making process. (304) Specifically, the OECD should promote transparency during the offset's solicitation, offer, and award phases.
During solicitation, purchasing governments should clearly state their offset requirements and make a declaration of whether offsets are an award criterion, as recommended by the Code of Conduct. (305) In addition, purchasing governments should publish the valuation formulas they intend to use to assess offset proposals. Although it is inherently difficult to make projections on a proposal's future production, sales, or profits, as is frequently done in technology transfer offsets, (306) the disclosure of valuation formulas would show whether a purchasing government is using reliable and relevant criteria to calculate an offset's value, or is using a method at risk for overstating projected benefits. (307) Formula publication promotes the use of defensible formulas for economic projections, and deters government officials from abusing their discretion. (308)
In the offer phase, offerors should separately account for offset transaction costs so purchasing governments may more accurately assess the benefits of purchasing an offset. (309) Accounting for such costs would depend on whether an offset is direct or indirect. Indirect offset costs are unrelated to the costs of the defense item and could easily be broken out. (310) However, direct offsets for items such as aircraft components are integral to the weapon system's price. (311) Therefore, to break out a direct offset's true cost, a vendor must disclose how much the component costs when manufactured both in the vendor's country and in the purchasing country. Such information constitutes proprietary data that a vendor may be reluctant to disclose. (312) Additionally, current FMS rules prohibit the U.S. Government from disclosing contractor proprietary data to a purchasing government without vendor authorization. (313) The U.S. government justifies this FMS policy by citing a perception that foreign governments do not want to highlight offset costs, and U.S. defense contractors do not want offset costs disclosed because they are concerned that a foreign government may refuse to pay for them. (314) However, in its own procurements, the U.S. Government increasingly requires offerors to provide uncertified cost and pricing data whenever the head of a procurement activity deems it necessary. (315) Moreover, it seems disingenuous to assert that a foreign government will be more willing to pay for an offset if it is kept ignorant of its cost. Instead of retroactively policing corruption through criminal statutes such as the FCPA, Bribery Act, and Anti-Bribery Convention, governments should promote offset cost transparency to prevent corruption from occurring in the first place.
Once an award occurs, purchasing governments should publicly disclose data on each offset recipient to maximize public awareness of how the government is spending the public's money. Disclosed information should include the names and addresses of local offset subcontractors, places of execution or performance, nature of the offset products or services to be supplied, and performance time limits. (316) Although the United States does not require publication of the names of defense subcontractors, the European Union does require it as a transparency measure. (317) A robust publication rule assists the general public in a purchasing country to judge for themselves whether a particular offset is corrupt, a politically-driven subsidy, or meritorious. (318)
2. Valuation Proposals
The OECD should promote rules that reign in valuation practices that distort an offset proposal's true value. Although the Code of Conduct requires E.U. member states to value offsets at a less significant weight than other award criteria in order to assure a procurement is based on best value, and to value offset proposals at no more than the total value of the defense sales contract, (319) these measures are insufficient to prevent the manipulation of offset values for corrupt purposes. In addition to adopting the Code of Conduct's restrictions, the OECD should also restrict the range of discretion government officials have in choosing offset multipliers.
The problems of offset valuation and offset over-valuation corruption have prompted both the European Union and Transparency International to recommend that offsets either receive less weight in award decisions than other economic factors, or no weight at all. (320) However, from an anti-corruption perspective, an offset's weight as an award criterion is not the most effective area upon which to focus offset reform efforts. First, because offsets currently constitute such a large percentage of the value of foreign defense sales contract (e.g., their value in U.S. vendor contracts is 63.5 percent), (321) it is not practical to require purchasing governments to give no consideration, or little consideration, to offsets. Offsets are simply too valuable to ignore. Second, Poland's F-16 purchase showed that an award criterion with the small comparative weight of fifteen percent, when compared to forty-five percent for price and forty percent for tactical criteria, can still be decisive when other criteria are evenly matched among bidders. (322) Third, the weight assigned to offsets as an award criterion is not particularly susceptible to corrupt exploitation, because the weight assigned to an award criterion affects all offerors equally. Instead of focusing on offset weight, anti-corruption advocates should focus on valuation tools such as offset multipliers, minimum value requirements, and valuation formulas that can manipulate an individual offeror's ratings.
Offset multipliers and minimum value requirements work together in a self-reinforcing spiral that distorts offset valuation. Purchasing governments often require minimum offset valuations which equal or exceed the value of the underlying defense sale, and they express their offset demands as a percentage of the value of the defense sales contract's price, not as an independent dollar figure. (323) However, offsets are not a "free lunch." Defense vendors must cover offset costs by increasing the total price of a defense sales contract, or by using multipliers to meet minimum offset requirements. (324) Multipliers are the only real means to reduce an excessive minimum offset demand, because an increase in the price of a defense sales contract only further increases that contract's offset requirement. Obtaining a high multiplier, then, becomes crucial for a vendor's success. Although all offerors must meet the same minimum offset requirement, (325) if offsets are an award criterion, (326) and if a procurement authority has discretion on what multiplier to assign to a specific offset proposal, (327) then a corrupt vendor has incentive to offer a bribe in exchange for a high multiplier that increases the value of its bid. When a government official is able to multiply an offset proposal by a factor ranging anywhere between ten to thirty times its actual value, (328) the temptation to bribe for a high multiplier is apparent.
Advocates for multipliers tout them as reducing the dollar burden of offset obligations, and as encouraging specific types of offset activity the purchasing government wishes to promote. (329) However, this argument does not acknowledge that in the current highly competitive defense market, it is not necessary to use multipliers to encourage offset activity. In a Kuwaiti procurement, for example, the government only required offsets worth thirty percent of the contract's value, yet the winning bid's offset package was worth 333 percent of the underlying contract's value. (330) To stay competitive in such a procurement, an offeror has no choice but to meet a purchasing government's offset demands.
To remedy the corruption risk posed by multipliers and offset value requirements, the OECD should narrow the discretionary range government officials have in calculating multiplier values, and cap total offset valuation at one hundred percent of the defense contract's value. Government officials must have discretion in calculating offset value to determine best value, but it seems excessive, to the point of inviting abuse, to give government officials the ability to multiply offset value by a factor between ten and thirty. (331) A narrower multiplier range, such as assigning a factor between zero and two, would be more temperate. Putting a maximum limit on offset valuations would require more selective multiplier use, and thereby put a needed check on offset officials' discretion. (332)
3. Competition Proposals
Finally, the OECD should set standards that more strictly define when a purchasing government may direct an offset to a local contractor. The Code of Conduct states that E.U. member states will allow foreign suppliers to select the most cost effective business opportunities within a purchasing country for offset fulfillment, which enables fair and open competition where appropriate. (333) However, this formulation leaves an open question as to when it is appropriate to enable fair and open competition. The Code of Conduct is unclear on whether national security grounds may allow a member state to direct an offset award to a local contractor. (334) To clarify this exception to competition, the OECD should specify that directing awards on national security grounds should be done only in reference to components directly related to a defense item, and that indirect offsets should be awarded through full and open competition.
Because directed awards may serve as the reward for a bribe, it would be ideal to place strict conditions on all mandated awards, regardless of whether they are directly or indirectly related to an offset. However, restricting mandated awards in the sphere of direct offsets is not feasible for national security and political reasons. Specifically, purchasing governments require direct offsets, such as technology transfer for key weapons components, (335) in order to reduce the threat posed by disruptions to security of supply, and to retain some technological control over a defense item. (336) Additionally, purchasing governments mandate that direct offsets be awarded to specific companies in order to keep a local defense contractor solvent, or to spread offset work equally among defense contractors. (337) Although offset critics allege the national security rationale has been abused to exempt defense procurements (particularly offsets) from regular procurement rules, in reality it is difficult to scrutinize whether defense procurement sourcing decisions are truly in the interest of national security. (338) Such decisions are inherent to a nation's sovereignty, and are political questions not subject to judicial review. (339) Therefore, regulating mandated awards for direct offsets is a non-starter. Instead, the OECD should form an international consensus for the proposition that national security concerns justify directing offset awards to companies producing a defense item and its components, but that mandated awards for indirect offsets are permissible only if otherwise allowable under a country's procurement rules.
Because indirect offsets are unrelated to a defense article or service, it may seem obvious that they are procured for economic reasons having no relation to national security interests or policies. (340) However, this is not an obvious conclusion in international defense trade. Defense products increasingly incorporate components designed for civilian use, such as aerospace software, into defense systems. (341) As a result, an indirect offset performed today could potentially benefit future business in a purchasing country's defense sector. Because of this cross-pollenation between certain civilian industries and the defense sector, some E.U. member states count offsets related to civilian sectors such as aerospace as direct offsets. (342) However, the OECD should prohibit such a loose definition of a direct offset. What should matter in characterizing an offset as direct or indirect is the intent of the offset when it is entered into. Potential uses that may not come to fruition are too speculative to form a basis for offset characterization, especially if such a characterization exempts an offset from competition.
B. Vendor Compliance Initiatives
To comply with anti-corruption statutes, defense vendors must institute compliance programs that prevent and detect criminal conduct. (343) Although anti- corruption statutes recognize that compliance program measures must be reasonable and in proportion to the corruption risk posed by the business relationship and transaction at issue, (344) this qualification is not helpful for defense vendors engaging in offsets. Specifically, offset corruption risks are among the highest in the defense sector (345) because offsets meet the criteria for nearly every corruption risk factor. (346) As a result, compliance measures for defense offset programs must necessarily meet a high standard. But if compliance programs are operated well, they may shield defense vendors from liability for an agent's criminal conduct. For example, when a former Morgan Stanley managing director in China pled guilty in 2012 to violating the FCPA by conspiring to evade the company's internal accounting controls, (347) DOJ declined to prosecute Morgan Stanley because it maintained a system of internal controls that included an internal policy prohibiting bribery; regular training on this policy; extensive due diligence on all new business partners; regular monitoring of transactions; and random audits of particular employees, transactions, and business units. (348) Due diligence and random audits are key components to compliance programs and to avoiding anti-corruption liability. Although due diligence and random audits are not low cost processes, defense vendors must improve their current level of compliance practice by heightening due diligence verification standards, and by executing electronic audits of offset partner documents.
1. Due Diligence Proposals
In a high risk transaction such as defense offsets, vendor due diligence should include investigations of proposed business partners' financial and business backgrounds, independent verifications of information provided by such potential partners, and periodic monitoring of business partners once a business relationship is established. (349) However, there is evidence that such practices are uncommon. A recent study by Ernst & Young found that only forty-four percent of the sampled international companies performed due diligence background checks on third parties, and when such due diligence was performed, companies mostly relied on information from potential partners without verification. (350) These practices exist despite the fact that thirty-nine percent of international respondents said that bribery or corrupt practices occurred frequently in their countries, and that fifteen percent of international respondents were prepared to make cash payments to win or retain business. (351) On an equally pessimistic note, a separate study by Transparency International confirmed that while most defense companies conduct initial due diligence inquiries such as background checks and questionnaires, these investigations usually do not verify information from potential business partners due to the difficulty and expense of such efforts. (352) These practices are especially surprising when considering the substantial criminal liability for a corruption offense. For example, BAE paid the U.S. DOJ a $400 million criminal fine for allegations arising from its bribery scandal with the Saudi government. (353) Heightened due diligence is expensive, but not in comparison to such exorbitant criminal fines.
To conduct due diligence that effectively screens potential business partners for corruption risks, defense vendors must institute a thorough, multi-step vetting procedure. First, vendors should gain a general understanding of a potential business partner by conducting a public database background investigation into the party's executives, subsidiaries, and third-party intermediaries. (354) In addition, defense vendors should review documents provided by the party such as its anti-corruption policies, procedures, and training activities; business statements regarding its services and billing procedures; and questionnaire responses about areas of concern. (355)
Next, vendors should conduct face-to-face interviews with key executives, business references, and government officials to verify information provided by third-party and public databases. (356) Conducting such interviews in-country, preferably on a one-on-one basis, is critical to obtaining candid, reliable verification. Interviews should also include personnel who actually process business transactions, such as the finance manager, controller, and operations manager. (357)
After conducting interviews, vendors should follow up on red flags discovered in the potential partner's relationships or business practices. If these red flags are resolvable, defense vendors should seek to mitigate the risks posed by the red flags by instituting remedial measures. For example, they should require the third party certify its compliance with the vendor's compliance program, incorporate warranties into its offset contract, and obtain independent confirmation of offset completion from government officials or third-party sign-off panels before receiving payment for offset work. (358)
Finally, vendors should periodically conduct re-vetting procedures such as the ones listed above to confirm that a third-party is operating legally. (359) Confirmation from such periodic monitoring is especially necessary for offsets requiring several years to complete, and for offsets occurring in corruption-prone geographic areas.
2. Documentation and Auditing Proposals
To strike a balance between maintaining costs and maintaining compliance, defense vendors should increase offset documentation requirements and institute more automated record reviews to maintain accountability over offset transactions. Specifically, defense vendors should require business partners to provide more documentation as a prerequisite for payment, and should scan these documents with analytical software to search for irregular transactional patterns. (360) With these measures, vendors can increase the pool of data to search for red flags, and focus the efforts of traditional, on-site audits.
In Ernst & Young's report, data showed that companies currently underutilize documentation and auditing measures; specifically, only forty-five percent of international companies have contractual audit rights in place to monitor their business partners' anti-corruption compliance. (361) Even if agents and suppliers sign contracts giving their customers audit rights, it is questionable whether the rights are practically enforceable. Traditional audits consist of site visits, interviews, and transaction testing, which are expensive to set up and execute. (362) Actually setting up an audit can take several months of negotiation, and several more in execution; as a result, an audit can be cost-prohibitive in terms of time and money. (363) In light of the global recession, companies are cutting back on labor-intrusive measures to remain competitive. (364) However, because document and accounting controls are key internal control features, (365) vendors must find a more cost effective means of maintaining accountability over their offset transactions.
In order to strike a new balance between maintaining compliance and reducing compliance costs, defense vendors should require business partners to provide multiple forms of documentation prior to payment, and should scan these documents with analytical software to detect red flags. (366) Such measures will replicate the thoroughness of traditional auditing site visits, yet leverage technology to reduce compliance costs.
Thorough documentation of offset transactions is critical to prove the offsets are legitimate, and to permit later data mining of these documents. For several decades, vendors have required offset partners to establish "evidence accounts" where they deposit copies of sales contracts, letters of credit, shipping documents, and other documentation to prove the existence of offset transactions. (367) Once documents were deposited in these accounts, defense vendors could retrieve them to confirm particular offset transactions. (368) For example, sales contracts and shipping documents could confirm whether a countertrade sale conformed with the quantity and price terms of an offset agreement, or resorted to dumping the offset product on world markets. (369) However, the usefulness of evidence accounts for electronic document scans has been limited because they have recorded mostly traditional sources of documentation. (370) To improve the utility of evidence accounts for data mining, offset contracts should also require offset partners to submit further documentation such as offset-related correspondence with government officials and commercial agents, status reports on offset progress, and inventories of offset components. If evidence accounts contained this level of documentation, there would be sufficient information for a thorough document scan.
Once a vendor gathers its offset documentation, the vendor could scan these documents with a variety of automated tools to look for red flags. Analytical software tools come in three main forms: statistical analysis, text analysis, and data visualization. Statistical analysis runs numerical data through mathematical formulas in order to detect statistical anomalies. (371) Data analysis uses keyword searches to extract words by category, theme, or meaning in order to identify corrupt intent or improper payments. (372) Finally, data visualization integrates information from data and statistical analysis onto visualization dashboards to assist analysts in detecting anomalous patterns. (373) Such techniques are not perfect. Text analysis, for example, is unable to detect corrupt intent if local data privacy laws prohibit email searches without the prior consent of sending and receiving parties, or if analysts are unfamiliar with a foreign language's idioms and nuances. (374) However, these analytical tools allow vendors to scan more documents than personal review, and they allow vendors to expedite audits by targeting specific red flags.
The unregulated state of defense offsets, combined with their many risk factors, make them especially vulnerable to corruption. Although there is currently no multinational consensus on how to regulate offsets, government regulation primarily through criminal statutes is insufficient. Offsets are government procurements, and as such countries providing and receiving offsets should affirmatively ensure they accomplish offset acquisitions without corruption. In addition, defense vendors should also heighten the urgency of their own compliance programs to further decrease offset corruption risks.
(1) Joint Committee on the Draft Bribery Bill, Draft Bribery Bill, 2008-9, H.L. 115-1, H.C. 430I, at 13 (U.K.); see Ministry of Justice, Bribery Act 2010, 2010, Circular 2011/05, at 2 (U.K.) (passage of U.K. Bribery Act 2010).
(2) David Leigh & Rob Evans, Secrets of Al-Yamamah, The Guardian, http://www.guardian.co.uk/baefiles/ page/0,,2095831,00.html (last visited Aug. 7, 2012) [hereinafter Leigh & Evans, AlYamamah]; David Leigh & Rob Evans, Nobbing the Police, The Guardian, http://www.guardian.co.uk/baefiles/page/ 0,,2098531,00.html (last visited Aug. 7,2012); see The Money Converter, http:// themoneyconverter.com/gbp/usd.aspx, (last visited May 9, 2012), for conversion from U.K. pounds to U.S. dollars. The contracts in question were collectively called the "A1 Yamamah" contracts, and involved the sale of fighter aircraft and jet trainers, the construction of two air bases, and the provision of a host of other equipment and services by BAE Systems for the government of Saudi Arabia. David Pallister, The Arms Deal They Called The Dove: How Britain Grasped The Biggest Prize, The Guardian, Dec. 14, 2006, at 9. The deal was entered into in 1988, and was eventually worth a total of 43 billion [pounds sterling] (S69.4 billion). Leigh & Evans, Al-Yamamah', The Money Converter.
(3) Leigh & Evans, Al-Yamamah, supra note 2; see The Money Converter, supra note 3, for conversion from U.K. pounds to U.S. dollars.
(4) Pallister, supra note 3, at 9.
(5) Sam Sole & Stefaans Brummer, BAE's 'Bribery' Channel, Mail & Guardian (South Africa), (Jun. 24, 2011, 12:00am), http://mg.co.za/article/2011-06-24-baes-bribery-channel; Ivor Powell, 'Consultant' at Centre of Arms Bribery Scandal, Argus Weekend (South Africa), Jun. 19, 2011, at NEWS, pg 4. See The Money Converter, supra note 3, for South African Rand/U.S. Dollar conversion.
(6) Sole & Brummer, supra note 6; Stephen Martin, Countertrade and Offsets: An Overview of the Theory and Evidence, in The Economics of Offsets: Defence Procurement and Countertrade 15, 31 (1996).
(7) Sole & Brummer, supra note 6.
(8) South Africa Reopens 1999 Arms Deal Investigation, BBC, (Sep. 15, 2011, 8:44 PM), http://www. bbc.co.uk/news/world-africa-14939077.
(9) Martin, supra note 7, at 31; U.S. Dep't Of Commerce, Offsets in Defense Trade: Sixteenth Study 1 (2012) [hereinafter Dep't of Commerce, Sixteenth Study]; U.S. Gen. Accounting Office, GAO/ NS1AD-96-65, Military Exports: Offset Demands Continue To Grow 1 (1996) [hereinafter Gen. Accounting Office, GAO/NSIAD-96-65],
(10) Transparency Int'l, Defence Offsets: Addressing the Risks of Corruption & Raising Transparency 18, 43 (2010) [hereinafter Transparency Int'l, Defence Offsets].
(11) Martin, supra note 7, at 31; Dep't of Commerce, Sixteenth Study, supra note 10, at 1; Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 1.
(12) See Jurgen Brauer & J. Paul Dunne, Introduction, in Arms Trade And Economic Development 1, 3 (2004) (citing Bernard Udis & Keith E. Maskus, Offsets as Industrial Policy: Lessons from Aerospace, in Defence Economics, Vol. 2, No. 2, at 152 (1991) (stating that offsets allow purchasing governments to recoup, or offset, some of their investment).
(13) Brauer & Dunne, supra note 13, at 4.
(14) Dep't of Commerce, Sixteenth Study, supra note 10, at 7-8.
(15) Gen. Accounting Office, GAO/NS1AD-96-65, supra note 10, at 2.
(16) Lloyd J. Dumas, Do Offsets Mitigate or Magnify the Military Burden?, in Arms Trade And Economic Development 16, 22 (Jurgen Brauer & J. Paul Dunne eds., 2004).
(17) Dep't of Commerce, Sixteenth Study, supra note 10, at 1; see Foreign Military Sales and Offsets: Hearing Before the H. Comm, on Energy and Commerce, 99th Cong. 3 (1985) (statement of Frank C. Conahan, General Accounting Office) (discussing offsets as a marketing tool for foreign military sales).
(18) Bernard Udis and Keith E. Maskus, US Offset Policy, in The Economics of Offsets: Defence Procurement and Countertrade 357, 358 (Stephen Martin ed., 1996).
(19) Id. at 359; Martin, supra note 7, at 34.
(20) Udis & Maskus, supra note 19, at 363.
(21) Dep't of Commerce, Sixteenth Study, supra note 10, at 3.
(22) Transparency Int'l, Defence Offsets, supra note 11, at 18-19.
(24) See generally Dep't of Commerce, Sixteenth Study, supra note 10, at 3-4, 7-8 (stating that defense sales and offset dollar amounts, indirect offsets accounting for 59.04 percent of U.S. offset transactions between 1993 and 2010, top four defense sectors participating in offsets).
(25) Transparency Int'l, Defence Offsets, supra note 11, at 4. From 1993 to 2010, the accompanying defense sales contracts numbered 763, and were worth $111 billion. Id. at 3.
(26) Dep't of Commerce, Sixteenth Study, supra note 10, at 4.
(27) James Lamont & James Boxell, India's Choice of a New Fighter Jet Reveals Hard Truths About a Promising Market--and the Risks for Politicians and Executives of Misreading It, Financial Times (USA ed.), Feb. 7, 2012, at 7.
(28) See Travis Taylor, Using Procurement Offsets as an Economic Development Strategy, in Arms Trade And Economic Development 30, 31 (Jurgen Brauer & J. Paul Dunne eds., 2004) (purchasing government pressure to extract offset concessions).
(29) Jeffrey P. Bialos et al.. Fortresses and Icebergs: The Evolution of the Transatlantic Defense Market and the Implications for U.S. National Security Policy 51 (2009).
(30) Jacques Gansler, Democracy's Arsenal: Creating A Twenty-First-Century Defense Industry 66, 150-151 (2011).
(31) Id. at 32-34, 150,311.
(32) Lamont & Boxell, supra note 28, at 7.
(33) See Taylor, supra note 29, at 31.
(34) E. Anders Eriksson et al., Study on the Effects of Offsets on the Development of a European Defence Industry and Market 30 (2007); see also U.S. Dep't Of Commerce, Offsets In Defense Trade: Twelfth Study at Appendix F (2007) (offsets as part of procurement decision) [hereinafter Dep't Of Commerce, Twelfth Study],
(35) Eriksson, supra note 35, at 30.
(36) Barre R. Seguin, Why Did Poland Choose the F-16?, George C. Marshall European Center For Security Studies Occasional Paper No. 11, at 11, 16 (2007). In the Polish fighter jet procurement, competitors were scored on a 100-point scale, with 45 points for best price, 40 points for tactical and operational criteria, and 15 points for offsets. Id.
(37) Id. at 11,30-31. Other key deciding factors were the formation of a strategic political and military alliance with the U.S., and financial inducements. Id. at 16, 25.
(38) Alon Redlich & Maison Miscavage, The Business Of Offset: A Practitioner s Perspective, in The Economics Of Offsets: Defence Procurement And Countertrade 381, 393 (Stephen Martin ed., 1996).
(40) Foreign Military Sales and Offsets, supra note 18, at 3; Dumas, supra note 17, at 16.
(41) Transparency Int'l, Defence Offsets, supra note 11, at 14.
(42) Steven Feldman, Government Contract Awards [section] 2:4 (2011) (discussing corruption in negotiations in general).
(43) Ernst & Young, Growing Beyond: A Place for Integrity 19 (12th Global Fraud Survey 2012) (negotiations as leading to corruption in offset agreements).
(44) Transparency Int'l, Defence Offsets, supra note 11, at 19.
(45) Seguin, supra note 37, at 24.
(46) Brian Loughman & Richard Sibery, Bribery and Corruption: Navigating the Global Risks 297 (2011).
(47) The top seven countries that U.S. defense firms export to are Australia, Egypt, Israel, Japan, South Korea, United Arab Emirates, and the United Kingdom. U.S. Gov't Accountability Office, GAO10-952, Defense Exports: Reporting on Exported Articles and Services Needs to be Improved 8 (2010) [hereinafter Gov't Accountability Office, GAO-10-952]. Of these countries, Transparency International ranked Egypt as 112 out of 182 countries for the cleanliness of its government, and the Middle East was ranked as the second-most corrupt region in the world after Sub-Saharan Africa. Transparency Int'l, Corruption Perceptions Index 2011 at 6-9 (2011) [hereinafter Transparency Int'l, Corruption Perceptions Index].
(48) Dep't of Commerce, Sixteenth Study, supra note 10, at 5, 27.
(49) Foreign Military Sales and Offsets, supra note 18, at 4; Ann Markusen, Arms Trade As Illiberal Trade, in Arms Trade And Economic Development 66, 75 (Jurgen Brauer & J. Paul Dunne eds., 2004).
(50) Dep't of Commerce, Sixteenth Study, supra note 10, at 5, 27.
(51) Markusen, supra note 50, at 75.
(52) Aris Georgopoulos, Revisiting Offset Practices in European Defence Procurement: The European Defence Agency's Code of Conduct on Offsets, 20 Pub. Procurement L. Rev. 3, 29, 33 (2011) [hereinafter Georgopoulos, Revisiting].
(53) Eriksson, supra note 35, at 3, 23.
(54) Foreign Military Sales and Offsets, supra note 18, at 4.
(55) Concerns Over Offsets Generated Using U.S. Foreign Military Financing Program Funds: Hearing Before the H. Subcomm. on Commerce, Consumer Protection, and Competitiveness, Comm, on Energy and Commerce, 112th Cong. 4 (1994) (statement of Frank C. Conahan, Assistant Comptroller General, National Security and International Affairs Division).
(56) See Transparency Int'l, Defence Offsets, supra note 11, at 14-15.
(57) Stefan Markowski & Peter Hall, Mandatory Defense Offsets--Conceptual Foundations, in Arms Trade And Economic Development 44, 45 (Jurgen Brauer & J. Paul Dunne eds., 2004) (discussing a lack of clarity in offset objectives).
(58) Bialos, supra note 30. at 79. The foreign sources a government may choose from are, 1) purchases from a sole foreign vendor, or 2) purchases from a cooperative, multinational weapons development program, such as the European consortium that developed the Eurofighter Typhoon +fighter jet. Id. at 79; Jay Edwards, The EU Defence and Security' Procurement Directive: A Step Towards Affordability?, International Security Programme Paper, 2011/05, 6 (August 2011). In multinational arrangements, governments protect their security of supply interests through the principle of fair return on investment, or "juste retour," which requires weapons programs to allocate the economic value of a project's work to companies in proportion to the financial contributions that those companies' participating governments made to the program. Commission Green Paper on Defence Procurement, at 4, 9, COM (2004) 608 final (Sep. 23, 2004) [hereinafter Green Paper]; Baudouin Heuninckx, A Primer To Collaborative Defence Procurement In Europe: Troubles, Achievements And Prospects, 17 Pub. Procurement L. Rev. 3, 123, at 135 (2008). However, juste retour and the differing legal problems that it raises is beyond the scope of this thesis.
(59) Baudouin Heuninckx, The EU Defence and Security Procurement Directive: Trick or Treat?, 20 Pub. Procurement L. Rev., 1,9, at 22 (2011) [hereinafter Heuninckx, Procurement Directive].
(60) For example, the European companies developing the F-35 in collaboration with Lockheed Martin will, allegedly at the direction of the U.S. government, receive versions of the F-35 that have protective measures installed in them that will prevent European partners from accessing the F-35's software, understanding its workings, modifying it, or performing repairs. Michele Nones et al., Europe and the F-35 Joint Strike Fighter (JSF) Program, Quademi IAI (English Series), at 59-60 (Gregori Alegi trans., July 2009). See also Bialos, supra note 30, at 5, 33 (stating that governments traditionally procure defense items from domestic industry to promote technological superiority of their weapons systems).
(61) Green Paper, supra note 59, at 4-5 (stating that offset requirements address security of supply and technological superiority concerns); U.S. Gen. Accounting Office, GAO-04-954T, Defense Trade: Issues Concerning the Use of Offsets in International Defense Sales 3 (2004) [hereinafter Gen. Accounting Office, GAO-04-954T] (describing offset requirements set by national laws or policies); Markowski & Hall, supra note 58, at 45-46 (stating that offsets use local content requirements to source a portion of the contract value in the buyer's territory); Markusen, supra note 50, at 68 (identifying that transfer of technology is typical in offset packages).
(62) Markusen, supra note 50, at 85; see also Taylor, supra note 29, at 31 (citing multiple objectives of offsets to include technology transfer, supporting domestic industry, gaining access to new markets, generating exports, and forming alliances with multinational corporations).
(63) Dumas, supra note 17, at 25; Markowski & Hall, supra note 58, at 45-46.
(64) Dumas, supra note 17, at 25.
(65) Markusen, supra note 50, at 80; Dumas, supra note 17, at 16.
(66) Jurgen Brau tr, Economic Aspects of Arms Trade Offsets, in Arms Trade and Economic Development 54, 55 (Jurgen Brauer & Paul Dunne eds., 2004).
(67) Markowski & Hall, supra note 58, at 45 (identifying a lack of clarity in offset objectives).
(68) See Id. (showing a difficulty in measuring offset success).
(69) Antoine Boessenkool, Small Firm, Big Player, Defense News, June 14, 2010, at 50.
(70) Transparency Int'l, Defence Offsets, supra note 11, at 14, 16.
(71) See Markowski & Hall, supra note 58, at 46 (describing offsets' use of countertrade, local content requirements, and bundled requirements); U.S. Dep'tof Def., DoD 5105.38-M, Security Assistance Management Manual, para. C.188.8.131.52 (3 Oct. 2003) (discussing offset costs hidden in contract line items) [hereinafter DoD 5105.38-M],
(72) See Organization for Economic Cooperation and Development, Bribery in Public Procurement: Methods, Actors and Counter-Measures 28 (2007) [hereinafter OECD Bribery in Public Procurement] (identifying that a lack of transparency caused by national security concerns and unique procurement requirements makes arms sales vulnerable to corruption).
(73) See Directive 2009/81/EC, of the European Parliament and of the Council of 13 July 2009 on the Coordination of Procedures for the Award of Certain Works Contracts, Supply Contracts and Service Contracts by Contracting Authorities or Entities in the Fields of Defence and Security, and Amending Directives 2004/17/EC and 2004/18/EC, 2009 O.J. (L216) 80 at [paragraph]27, 94 at Arts. 13(a) & 13(b) [hereinafter 2009 Directive] (discussing the exclusion of contracts for intelligence activities and contracts containing sensitive information from the E.U. Defense Procurement Directive due to national security and confidentiality concerns); Transparency Int'l, Defence Offsets, supra note 11, at 14, 16 (showing the opaque nature of defense procurement); Andrew Feinstein, The Shadow World: Inside the Global Arms Trade 179 (2011) (reviewing offsets hindered by commercial confidentiality).
(74) See Martin, supra note 7, at 15, 31 (detailing individual offset projects not available in public databases).
(75) Id. at 33.
(76) Id.; Eriksson, supra note 35, at 3; Bialos, supra note 30, at 96.
(77) Markowski & Hall, supra note 58, at 45-46.
(78) Markusen, supra note 50, at 68.
(79) Markowski & Hall, supra note 58, at 46.
(80) Technology transfer may take the form of research and development conducted abroad, technical assistance provided to the subsidiary or joint venture of overseas investment, or other activities under direct commercial arrangement between the defense vendor and offset recipient. Dep't of Commerce, Sixteenth Study, supra note 10, at 29.
(81) Training generally includes skills related to the production or maintenance of the exported defense item. Training may also be required in areas unrelated to the defense item, such as computer training, foreign language skills, or engineering capabilities. Id.
(82) Credit assistance consists of direct loans, brokered loans, loan guarantees, assistance in achieving favorable payment terms, credit extensions, and lower interest rates. Id. at 27.
(83) Id. at 22.
(84) Markowski & Hall, supra note 58, at 46.
(85) Markusen, supra note 50, at 73.
(86) Subcontracting is a direct commercial arrangement between the defense prime contractor and a foreign producer to make in the purchasing country a part or component of a US-origin defense article. Dep't of Commerce, Sixteenth Study, supra note 10, at 29.
(87) Licensed production is a transfer of technical information under direct commercial arrangements between a manufacturing vendor and a foreign government or producer, made in order to produce in the purchasing country a part or component of a US-origin defense article. Id. at 28.
(88) Co-production is a government-to-government agreement authorizing the transfer of technology to permit foreign companies to manufacture all or part of a US-origin defense article. Id. at 27. Coproduction is made pursuant to a Foreign Military Sale. Id.
(89) Investment is a dedication of capital to the establishment of a foreign entity unrelated to the defense sale, or to expanding the US firm's subsidiary or joint venture in the foreign country. Id. at 28.
(90) Id. at 22.
(91) Markowski & Hall, supra note 58, at 46.
(92) Barter is a one-time transfer under a single contract that specifies the exchange of goods or services of equivalent value. Martin, supra note 7, at 32.
(93) Counter-purchase is an agreement by the defense vendor to buy, or find a buyer for, a specified value of off-the-shelf items from the offset recipient. Id.; Dep't of Commerce, Sixteenth Study, supra note 10, at 29.
(94) Buy-back is an agreement for the defense vendor to accept as full or partial repayment products that are derived from the original exported product. Martin, supra note 7, at 32.
(95) Jean-Paul Hebert Interdisciplinary Research Center For Peace And Strategy Surveys-Paris, Offsets And French Arms Exports, in The Economics Of Offsets: Defense Procurement And Countertrade 139, 141-142 (Stephen Martin, ed. 1996).
(96) Brauer, supra note 67, at 56-57.
(97) Id. at 55.
(98) Dep't of Commerce, Sixteenth Study, supra note 10, at 22.
(99) See Transparency Int'l, Defence Offsets, supra note 11, at 17 (criticism of offset valuation criteria); The U. N. Comm'n on On Int'l Trade Law, Legal Guide on International Countertrade Transactions 67-68, 71-72 (1993) [hereinafter UNCITRAL Legal Guide] (providing various methods for calculating the value of an offset); Dep't of Commerce, Sixteenth Study, supra note 10, at 27; Feinstein, supra note 74, at 177-178 (discussing South African procurement scoring offsets based on their assessed value); Won-Joon Jang et al., The Defense Offset Valuation Model, The DISAM Journal, Dec. 2007, at 91, 92-93 (discussing the Korean government assessing technology offsets based on valuation models, as opposed to assessments based on cost).
(100) See Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 2 (offset credits as satisfying performance); Eriksson, supra note 35, at 30 (banked offset credits as satisfying performance); Barry Marvel, The Reverse Piggyback Offset, Contract Management, Jul. 1, 2001 at 36 (banked offset credits as satisfying performance).
(101) Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 2.
(102) Id. at 27-28 (discussing the minimum offset percentage for Korean defense contracts above $5 million in late 1980s).
(103) Eriksson, supra note 35, at 30; see also Dep't Of Commerce, Twelfth Study, supra note 35, at Appendix F.
(104) Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 2; Gen. Accounting Office, GAO-04-954T, supra note 62, at 1; Ron Matthews, Defense Offsets: Policy Versus Pragmatism, in Arms Trade And Economic Development 89, 98 (Jurgen Brauer & J. Paul Dunne eds., 2004).
(105) Dep't of Commerce, Sixteenth Study, supra note 10, at 28.
(106) See Dep't Of Commerce, Twelfth Study, supra note 35, at Appendix F (showing offset multipliers used by Greece, the Netherlands, and Taiwan).
(107) Redlich & Miscavage, supra note 35, at 395-396.
(108) Id. at 395; Dep't Of Commerce, Twelfth Study, supra note 35, at Appendix F.
(109) See Jang et al., supra note 100, at 92-93 (describing technology valuation models to assess offset proposals, as opposed to assessments based on cost).
(110) See UNCITRAL Legal Guide, supra note 100, at 71-72.
(111) James C. Nobles, Jr. & Johannes Lang, The UNCITRAL Legal Guide on International Countertrade Transactions: The Foundation for a New Era in Countertrade?, 30 Int'l Law 739, 749 (1996) (offset valuation as a weak point); Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 2 (lack of market data); Markowski & Hall, supra note 58, at 47, 49 (lack of market data and imperfect data on merits of a local contractor).
(112) See UNCITRAL Legal Guide, supra note 100, at 72 (showing valuation methods for offset royalties); Markowski & Hall, supra note 58, at 49 (providing the risk of default on offset obligations); Dumas, supra note 17, at 22 (citing a risk of vendors shirking offset obligations or performing them in a perfunctory manner).
(113) Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 2.
(114) Markowski & Hall, supra note 58, at 46.
(115) Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 2.
(116) Eriksson, supra note 34, at 30; Marvel, supra note 101, at 36; Sandeep Verma, Offset Contracts Under Defence Procurement Regulations in India: Evolution, Challenges and Prospects 25, (H.C.M. Rajasthan State Institute of Public Administration Occasional Paper No. 16, 2009) available at http:// ssm.com/abstract= 1464709.
(117) Marvel, supra note 101, at 36.
(118) Matthews, supra note 105, at 98.
(119) See Brauer & Dunne, supra note 13, at 3 (citing Udis & Maskus, supra note Bat 152 (discussing how offsets allow purchasing governments to recoup, or offset, some of their investment).
(120) Loughman & Sibery, supra note 47, at 299; Interview with Lorrine L. Romero, Senior Counsel, General Law, Raytheon, in Arlington, VA(Mar. 8, 2012); Marvel, supra note 101, at 36.
(121) APCO Oil & Gas Int'l, Inc., FCPA Guide, http://www.apcooilandgas.com/profiles/investor/ FullPage.asp?BzID=1671&lD=9892&secid=0, (last visited May 17, 2012); Loughman & Sibery, supra note 47, at 96. For a discussion of the FCPA, see infra, Section IV of this thesis.
(122) Markusen, supra note 50, at 77; Redlich & Miscavage, supra note 35, at 393; Woolf Committee Report, Business Ethics, Global Companies And The Defense Industry 25, 28 (2008).
(123) Markusen, supra note 50, at 71.
(124) Redlich & Miscavage, supra note 39, at 381, 385.
(125) Id. at 398.
(126) Redlich & Miscavage, supra note 39, at 381; Woolf Committee Report, supra note 123, at 28.
(127) UNCITRAL Legal Guide, supra note 100, at 78 (showing offset third parties acting as trading companies); Redlich & Miscavage, supra note 39, at 385 (showing offset brokers as marketers for a targeted country).
(128) UNCITRAL Legal Guide, supra note 100, at 85.
(129) Marvel, supra note 101, at 36.
(130) Romero, supra note 121.
(131) Woolf Committee Report, supra note 123, at 25, 28 (2008).
(133) Marvel, supra note 101, at 36.
(134) Id. The "reverse" term refers to the broker seeking out the multi-national corporation with an offset proposal, versus the corporation hiring the broker to then develop a proposal. The "piggyback" term refers to the broker piggybacking its own offset project onto the corporation's sponsorship into a foreign market.
(135) See Markusen, supra note 50, at 77 (vendors buying offset credits in the market from brokers).
(136) Gen. Accounting Office, GAO-04-954T, supra note 62, at 2 (identifying offsets unregulated in U.S.); Eriksson, supra note 35, at 29 (identifying offsets regulated by only half of members of the E.U., and existing regulations in some countries are non-binding); Dep't of Commerce, Sixteenth Study, supra note 10, at 4 (providing offsets entered into by U.S. companies generating $56 billion in trade between 1993 and 2010).
(137) Revision of the Text of the 1994 Agreement on Government Procurement, Marrakesh Agreement Establishing the World Trade Organization, Annex 4, (Dec. 15, 2011) [hereinafter GPA]. The GPA establishes an international framework of rights and obligations regarding government procurement. The cornerstone principles of the GPA are non-discrimination and transparency in government procurement among its member states. Because the GPA is a "plurilateral" agreement, only WTO members who are signatories to the GPA are bound by its terms. See World Trade Organization, Government Procurement: The Plurilateral Agreement, available at http://www.wto.org/english/tratop_e/gproc_e/gpa_overview_e.htm.
(138) GPA, supra note 138, at art. XVI(1).
(139) For example, although the E.U. is a member of the GPA, many E.U. member states still have laws or policies requiring offsets for their defense procurements. Id. at E.U. Annex 1 (identifying E.U. membership in the GPA); Eriksson, supra note 35, at 4 (providing offset policies of a sample of E.U. member states).
(140) GPA, supra note 138, at art. XXIII(l).
(141) In the U.S. Annex to the GPA, for example, multiple types of purchases are explicitly excluded from GPA coverage. GPA, supra note 138, at U.S. Annex 1.
(142) Arie Reich, The New Text of the Agreement on Government Procurement: An Analysis and Assessment, 12 J. Int'l Econ. L. 989, 992 (2009).
(145) Markusen, supra note 50, at 76.
(146) Although an offset may be managed in some countries by a separate ministry, the purchase of the offset itself is done through the defense ministry. See Marvel, supra note 101, at 36.
(147) GPA, supra note 138, at Japan Annex 1; Markusen, supra note 50, at 76 (auto parts offsets in Japan).
(148) Stacy N. Ferraro, The European Defence Agency: Facilitating Defense Reform or Forming Fortress Europe?, 16 Transnat'l L. & Contemp. Probs. 549, 555 (2007); Green Paper, supra note 59, at 4.
(149) Eriksson, supra note 35, at 29.
(150) Id. at 25 (discussing an EDA study opining offsets violate the free movement of goods and services required by the European Community Treaty); Georgopoulos, Revisiting, supra note 53, at 31.
(151) Georgopoulos, Revisiting, supra note 53, at 30, 31.
(152) European Defence Agency, Code of Conduct on Offsets 1 (last visited May 3, 2011), available at http://www.eda.europa.eu/migrate-pages/Otheractivities/CoCOffsets.
(153) Id. at 3-4.
(154) Id. at 1.
(155) See Georgopoulos, Revisiting, supra note 53, at 32 (identifying a lack of enforcement mechanism in Code of Conduct on Offsets).
(156) 2009 Directive, supra note 74, at 76.
(157) GPA, supra note 138, at art. Ill; 2009 Directive, supra note 74, at 92.
(158) Heuninckx, Procurement Directive, supra note 60, at 25-26.
(159) 2009 Directive, supra note 74, at 90-91.
(160) Id. at art. 13(c), 2009 O.J. (L216) 76, 94.
(161) Id. at art. 12, 2009 O.J. (L216) 76, 94; Christopher R. Yukins, Feature Comment, The European Defense Procurement Directive: An American Perspective, 51 Gov't Contractor [paragraph] 383, Nov. 4, 2009, at 6.
(162) 2009 Directive, supra note 74, at 94.
(163) Edwards, supra note 59, at 6.
(164) Nones, supra note 61, at 8-9; U.S. Gen. Accounting Office, GAO-03-775, Joint Strike Fighter Acquisition; Cooperative Program Needs Greater Oversight to Ensure Goals are Met 1 (2003) [hereinafter Gen. Accounting Office, GAO-03-775].
(165) Seguin, supra note 37, at 11.
(166) U.S. Gen. Accounting Office, GAO/NSIAD-93-13, Military Exports: Recent Implementation of Offset Legislation 4 (1990); Gen. Accounting Office, GAO-04-954T, supra note 62, at 2.
(167) Defense Production Act Amendments of 1992, Pub. L.No. 102-558, Title I, Part C, [section] 123,106 Stat. 4198); see Udis & Maskus, supra note 18, at 359-360 (discussing the refusal of the U.S. government to intervene with a foreign government to satisfy an offset obligation after 1978).
(168) An additional U.S. statutory control of offsets is the Feingold Amendment, which prohibits vendors and their agents from making incentive payments for the satisfaction of offset obligations. 22 U.S.C. [section] 2779a (2010). For a discussion of the politics behind the creation of this amendment, see Udis & Maskus, supra note 18, at 366-367.
(169) The Defense Institute of Security Assistance Management, The Management of Security Assistance 1-2, 1-6, 15-1 (27th ed. 2007) [hereinafter DISAM],
(170) Id. at 1-6. For the general criteria a defense export must meet to obtain an export license, see The Arms Export Control Act, 22 U.S.C. [section] 2753 (2010).
(171) Foreign Relations Violations, 22 C.F.R. [section] 127.1(a); DISAM, supra note 170, at 15-2.
(172) DISAM, supra note 169, at 15-2.
(173) Dep't of Commerce, Sixteenth Study, supra note 10, at 14; Matthews, supra note 105, at 99 (stating that 85 percent of U.S. offsets were satisfied with technology that is over 10 years old).
(174) United States ex. rel. Campbell v. Lockheed Martin Corp., 282 F. Supp. 2d 1324, 1327 (M.D. Fla. 2003); DISAM, supra note 170, at 1-2; See also Defense Federal Acquisition regulation supplement [hereinafter DFARS], [section] 225.7300-7307 (2002) for FAR regulations pertaining to FMS.
(175) Foreign-Owned Military Aircraft and Naval Vessels, and the Foreign Military Sales Program, 22 C.F.R. [section] 126.6; DISAM, supra note 169, at 1-2.
(176) Campbell, 282 F. Supp. 2d at 1327.
(177) See DISAM, supra note 169, at 9-7 (describing the availability of sole-source FMS due to a purchasing government's competition); FAR [section] 6.302-4 (1998) (stating that sole source selection by the U.S. government is allowed when acquisition will be reimbursed by a foreign country through a Letter of Offer and Acceptance); Redlich & Miscavage, supra note 39, at 393 (identifying defense item, price and offset package as the three parts of a defense vendor's bid to a purchasing government).
(178) DISAM, supra note 169, at 9-7, 9-19--9-20.
(179) Id. at 9-19-9-20; DFARS [section] 225.7306.
(180) DISAM, supra note 169, at 9-19 to 9-20; FAR [section] 225.7303-2(a)(3) (2012); DoD 5105.38-M, supra note 72, at C184.108.40.206.
(181) DISAM, supra note 169, at 9-19 to 9-20; DoD 5105.38-M, supra note 72, at C220.127.116.11.
(182) See DISAM, supra note 169, at 9-20 (showing that the U.S. government is the "banker" for offset transactions).
(183) DFARS [section] 225.7304(a) (2012); FAR [section] 6.302-4 (1998). "Full and open competition" is when all responsible sources are permitted to compete in a contract action. FAR [section] 2.101 (2013).
(184) DoD 5105.38-M, supra note 72, at C6.3.4; Anthony J. Perfilio, Foreign Military Sales Handbook [section] 6:13 (2010).
(185) Perfilio, supra note 185, at [section][section] 5:3, 5:27. Under the FAR, a cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. FAR [section] 31.201-3 (1998). A cost is allocable if it is assignable or chargeable to a contract. FAR [section] 31.201-4 (1998).
(186) Interview with Charles Blair, Branch Chief Aviation Procurement Law Section, Army Aviation Life Cycle Management Command, U.S. Department of the Army (Feb. 24, 2012); but see Perfilio, supra note 185, at [section] 5:27 (displaying a contracting officer not having much visibility over offset costs in a competed FMS contract).
(187) 15 U.S.C. [section][section] 78dd-1-78ff, 78m (1998).
(188) Bribery Act, c.23, 2010 (U.K.).
(189) Organisation for Economic Co-operation and Development, Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Nov. 21, 1997, 37 I.L.M. 1, art. 1 [hereinafter OECD Anti-Bribery Convention].
(190) 15 U.S.C. [section][section] 78dd-1(a), 78dd-2(a), 78dd-3(a) (1998) (stating that bribery of foreign officials is prohibited by securities issuers, domestic concerns, and persons other than issuers or domestic concerns); Bribery Act, c.23, [section] 6, 2010 (U.K.) (bribery of a foreign public official); OECD AntiBribery Convention, supra note 190, at art. 1 (bribery of a foreign public official).
(191) Bribery Act, c.23, [section] 1, 2010 (U.K.) (bribing another person).
(192) 15 U.S.C. [section] 78m (1998).
(193) Bribery Act, c.23, [section] 7, 2010 (U.K.).
(194) Gov't Accountability Office, GAO-10-952, supra note 48, at 6-7.
(195) 3 1 U.S.C. [section][section] 3729-3733 (2009).
(196) 15 U.S.C. [section][section] 78dd-1 (a), 78dd-2(a), 78dd-3(a) (1998); Bribery Act, 2010, c.23, [section] 6 (U.K.); OECD Anti-Bribery Convention, supra note 190, at art. 1.
(197) Loughman & Sibery, supra note 47, at 12; F. Joseph Warin et al., The British are Coming!: Britain Changes its Law on Foreign Bribery and Joins the International Fight Against Corruption, 46 Tex. Int'l L.J. 1, 15(2010).
(198) See 15 U.S.C. [section][section] 78dd-l(a), -2(a), -3(a); Bribery Act, c.23, [section] 6, 2010 (U.K.). The OECD does not require uniformity of language among countries' statutes, but only functional equivalence. Organization for Economic Co-operation and Development, Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and Related Documents 14 (2011) [hereinafter OECD Related Documents].
(199) OECD Anti-Bribery Convention, Nov. 21, 1997, 37 I.L.M. 1, preamble, art. I; Organisation for Economic Cooperation and Development, OECD Anti-Bribery Convention: Entry into Force of the Convention, available at http://www.oecd.Org/document/12/0,3746, en_2649_34859_2057484_1_1_1_1,00.html (last visited July 18, 2012) [hereinafter OECD Entry Into Force].
(200) OECD Anti-Bribery Convention, Nov. 21, 1997, 37 I.L.M. 1, preamble; OECD Entry Into Force, supra note 200. The forty countries are: Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, Colombia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Russian Federation, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions: Ratification Status as of 20 Novemer 2012, available at http://www.oecd.org/daf/anti- bribery/antibriberyconventionratification.pdf.
(201) OECD Anti-Bribery Convention, supra note 190, at art. 1. The phraseology for who is a foreign public official differs among the Anti-Bribery Convention, FCPA, and Bribery Act. Under the AntiBribery Convention, a foreign public official is "any person holding a legislative, administrative or judicial office of a foreign country, whether appointed or elected; any person exercising a public function for a foreign country, including for a public agency or public enterprise; and any official or agent of a public international organization." Id. at art. 1(4). The Bribery Act largely adheres to this definition, varying only by making reference to countries or territories outside the United Kingdom. Bribery Act, c.23, [section] 6(5), 2010 (U.K.). However, under the FCPA, a foreign official is "any officer or employee of a foreign government or any department, agency or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization." 15 U.S.C. [section][section] 78dd-1(f)(1), -2(h)(2), -3(f)(2) (2012).
(202) OECD Anti-Bribery Convention, Nov. 21, 1997, 37 I.L.M. 1, preamble, art. 1. Under the FCPA, a party must act with corrupt intent. 15 U.S.C. [section][section] 78dd-1(a), -2(a), -3(a). Although the FCPA does not define corrupt intent, courts interpreting this element have stated an act is with corrupt intent if done willfully, voluntarily, intentionally, and with a bad purpose of accomplishing either an unlawful end or result, or a lawful end or result by some unlawful method or means. U.S. v. Liebo, 923 F.2d 1308, 1312 (8th Cir. 1991); U.S. v. Kay (Kay III), 513 F.3d 461, 464 (5th Cir. 2007). The Bribery Act and Anti-Bribery Convention do not require corrupt intent; this was done in order to forestall any defenses alleging cultural norms or expectations that make a questionable payment legitimate. Warin, supra note 198, at 16; see also Bribery Act, c.23, [section] 6, 2010 (U.K.); OECD Anti-Bribery Convention, Nov. 21, 1997, 37 I.L.M. 1, art. 1 (lack of reference to corrupt intent).
(203) OECD Related Documents, supra note 199, at 14.
(204) Id. For FCPA liability for payments made to entities owned or affiliated with government officials, see Robert W. Tarun, The Foreign Corrupt Practices Act Handbook 7 (2d ed. 2012). For Bribery Act liability, see Ministry of Justice, The Bribery Act of 2010--Guidance, 2011, at 12-13 (U.K.).
(205) OECD Anti-Bribery Convention, Nov. 21, 1997, 37 I.L.M. 1, art. 1; see also 15 U.S.C. [section][section] 78dd-l(a), -2(a), -3(a); Bribery Act, 2010, c.23, [section] 6 (U.K.) (liability for indirect payments through intermediaries).
(206) OECD Related Documents, supra note 199, at 14; Tarun, supra note 205, at 7; Ministry of Justice, supra note 205, at 12-13.
(207) Gen. Accounting Office, GAO/NS1AD-96-65, supra note 10, at 2.
(208) Liability under the FCPA for a bribe to an employee of a state-owned enterprise is currently being litigated; however, so far courts have denied defense motions to dismiss prosecutions based on bribes to state-owned entities, deciding that the definition of a foreign official is a question of fact. U.S. v. Aguilar, 783 F. Supp. 2d 1108, 1115, 1120 (C.D. Cal. 2011).
(209) Georgopoulos, Revisiting, supra note 53, at 36.
(210) Warin, supra note 198, at 43.
(211) Bribery Act, c.23, [section] 6, 2010 (U.K.).
(212) 18 U.S.C. [section] 1952 (2002); 18 U.S.C. [section] 1343 (2008).
(213) To date, only one federal prosecution has resulted in a reported case charging commercial bribery under the Travel Act and Federal Wire Fraud Act. See U.S. v. Welch, 327 F.3d 1081 (2003) (discussing commercial bribery of members of International Olympic Committee).
(214) Transparency Int'l, Defence Offsets, supra note 11, at 14.
(215) An issuer of securities is a publicly traded company which files an application with the Securities and Exchange Commission to register on a national securities exchange. 15 U.S.C. [section] 781(b) (2012).
(216) 15 U.S.C. [section] 78m(b)(2) (1998).
(217) See Warin, supra note 198, at 35 (accounting the requirements of U.K. Companies Act 2006).
(218) U.S. Securities and Exchange Commission, SEC Enforcement Actions: FCPA Cases, http://www. sec.gov/spotlight/fcpa/fcpa-cases.shtml (last visited May 24, 2012) (listing of growing number of FCPA enforcement actions by the SEC per year). In 2010, the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) had over 70 enforcement actions under the FCPA, with over $1.4 billion in fines. Tarun, supra note 205, at xxvii; Loughman & Sibery, supra note 47, at 5.
(219) 15 U.S.C. [section] 78m(b)(2)(A) (1998).
(220) Tarun, supra note 205, at 13.
(221) OECD Bribery in Public Procurement, supra note 73, at 39-40; see Feinstein, supra note 74, at 83 (categorizing of BAE Systems' bribes to Saudi officials as a marketing expense); Leigh & Evans, Al-Yamamah, supra note 3 (categorizing of BAE Systems' bribes to Saudi officials as a marketing expense).
(222) 1 5 U.S.C. [section] 78m(b)(2)(B) (1998). The FCPA's full requirements are that an issuer provide reasonable assurances that: (1) transactions are executed in accordance with management authorization, (2) transactions are recorded as necessary to permit preparation of conforming financial statements and maintain accountability for assets, (3) access to assets is permitted only according to management authorization, and (4) recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken on discrepancies. Id.
(223) Bribery Act, c.23, [section] 7, 2010 (U.K.).
(224) Warin, supra note 198, at 8.
(225) Bribery Act, c.23, [section] 7(1), 2010 (U.K.).
(226) Id. at [section] 8(1).
(227) Id. at [section] 8(3); Ministry of Justice, supra note 205, at 16 (U.K.). Guidance by the U.K. Ministry of Justice (MOJ) states the degree of control a company has over an entity will be taken into account in prosecution decisions, and the fact a company benefits indirectly from a third party's bribe is unlikely, by itself, to prove the entity intended to benefit the company. Ministry of Justice, supra note 205, at 17. However, this assurance is cold comfort because the MOJ determines if an offense occurred by examining the intent of the bribe-giving party; the crime of failing to prevent bribery imposes strict liability for the company. Bribery Act, c.23, [section] 7(1) 2010 (U.K.); Ministry of Justice, supra note 205, at 17; Tarun, supra note 205, at 432.
(228) Bribery Act, c.23, [section][section] 1, 6, 7(3)(a), 2010 (U.K.).
(229) 1 5 U.S.C. [section] 78m(a); Bribery Act, c.23, [section] 7(5), 2010 (U.K.).
(230) Ministry of Justice, supra note 205, at 15-16; Organisation for Economic Co-operation and Development, Phase 3 Report on Implementing the OECD Anti-Bribery Convention in the United Kingdom 15 (2012) [hereinafter OECD Phase 3 Report]; Loughman & Sibery, supra note 47, at 30.
(231) World Wide Military Expenditures--2011, http://www.globalsecurity.org/military/world/ spending.htm (last visited Sep. 7 2012); Military Ranking: The World's Biggest Defence Budgets, The Economist (Mar. 9, 2011, 2:57 PM), http://www.economist.com/blogs/dailychart/2011/03/ defence_budgets.
(232) 31 U.S.C. [section] 3729(a)(1) (2009).
(233) United States ex. rel. Campbell v. Lockheed Martin Corp., 282 F. Supp. 2d 1324, 1329. 1340 (M.D. Fla. 2003). In the only other reported case to consider the question, the reasoning and holding of United States ex. rel Campbell was confirmed in United States ex rel. Hayes v. CMC Elec., Inc., 297 F. Supp. 2d 734, 737-738 (D.N.J. 2003).
(234) 31 U.S.C. [section] 3729(a)(1) (2009). Campbell, 282 F. Supp. 2d at 1329, 1340.
(235) Campbell, 282 F. Supp. 2d at 1342.
(237) 31 U.S.C. [section][section] 3729(a)(1)(A), 3729(a)(1)(B) (2009).
(238) See 31 U.S.C. [section][section] 3729(b)(1) (2009) (FCA definition of knowledge).
(239) See Feinstein, supra note 74, at 177-178, 182 (displaying the offset valuation scheme in South African procurement); Transparency Int'l, Defence Offsets, supra note 11, at 18-19, 43 (discussing corruption in award of offsets).
(240) Feinstein, supra note 74, at 83-84; Transparency Int'l, Defence Offsets, supra note 11, at 17.
(241) See Transparency Int'l, Defence Offsets, supra note 11, at 18 (list of corruption risks in offsets).
(242) OECD Bribery in Public Procurement, supra note 73, at 47.
(243) See Id. at 47 (showing forms that a bribe may take).
(244) See Id. at 38-40, 41-42 (displaying the use of intermediaries to offer bribes in government procurement).
(245) Charles M. Sennott, US Sees Conflict of Interest over Arms Commerce, Boston Globe, May 9, 1996, at 1. In addition, one economist has called the issuance of offsets "the equivalent of what we used to do when we bribed foreign officials. Leslie Wayne, quoting Robert E. Scott, A Well-Kept Military Secret, N.Y. Times, Feb. 16, 2003, [section] 3 at 1. Finally, other observers have equated offsets to "bribes and corporate welfare." Derrick Z. Jackson, US Plays the Arms Sales Game, Boston Globe, Feb. 21, 2003, at A19.
(246) OECD Anti-Bribery Convention, Nov. 21, 1997, 37 I.L.M. 1, art. 1; 15 U.S.C. [section][section] 78dd-1. -2, -3; Bribery Act, c.23, [section] 6, 2010 (U.K.).
(247) Feinstein, supra note 74, at 181.
(248) Living with the U.S. Foreign Corrupt Practices Act (FCPA) in an Era of Enhanced Enforcement, 22 SPG Int'l Law Practicum 3,5 (2009) (gift of stock as a bribe under the FCPA). Such a transaction may also constitute a bribe under local bribery laws; see Daniel Y. Jun, Bribery Among the Korean Elite: Putting an End to a Cultural Ritual and Restoring Honor, 29 Vand. J. Transnat'l L. 1071, 1090 (1996) (state official's receipt of stock acted as a bribe under Korean bribery law); OECD Bribery in Public Procurement, supra note 73, at 47 (gift of stocks as a bribe).
(249) See sections II. A. and II.C of this article for a discussion of offset incentives, products and services.
(250) See Feinstein, supra note 74, at 177-178, 182 (offset valuation scheme in South African procurement).
(251) See Eriksson, supra note 33, at 30 (offsets used as an award criterion in E.U. Member States); Feinstein, supra note 74, at 177-178, 182 (manipulation of offset valuation in a South African procurement).
(252) For example, in U.S. procurements, proposed costs or prices constitute protected source selection information. FAR [section] 2.201 (2013). The U.S. government is prohibited from disclosing cost or pricing data to a purchasing government without the consent of the vendor. DFARS [section] 225.7304(c) (2012); DoD 5105.38-M, supra note 72, at C18.104.22.168.
(253) Markowski & Hall, supra note 58, at 49.
(254) Robert Howse, Beyond the Countertrade Taboo: Why the WTO Should Take Another Look at Barter and Contertrade, 60 U. Toronto L.J. 289, 310 (2010).
(255) Nobles & Lang, supra note 112, at 749 (discussing offset valuation as a weak point); Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 2 (showing a lack of market data); Markowski & Hall, supra note 58, at 47, 49 (showing a lack of market data and imperfect data on merits of a local contractor).
(256) See Dumas, supra note 17, at 23-24 (showing the risk of failure when defense vendors work as venture capital firms for offsetting companies).
(257) See Jang et al., supra note 100, at 93; UNCITRAL Legal Guide, supra note 100, at 71-72 (discussing the valuation of technology transfer based on estimated future royalties).
(258) Jang et al., supra note 100, at 93-94; UNCITRAL Legal Guide, supra note 100, at 71-72.
(259) Matthews, supra note 105, at 98; The Money Converter, supra note 3.
(260) Feinstein, supra note 74, at 177, 182.
(261) Id. at 177-178.
(262) Id. at 178.
(263) Id. at 180.
(264) Id. at 179.
(265) See Loughman & Sibery, supra note 47, at 298.
(266) Transparency Int'l, Defence Offsets, supra note 11, at 17-18.
(267) See Gen. Accounting Office, GAO-04-954T, supra note 62, at 1 (offset negotiations required prior to contract award); Redlich & Miscavage, supra note 39, at 403 (providing over 100 offset opportunities identified in offset negotiations with Israel); Seguin, supra note 37, at 22 (citing 104 offset commitments in F-16 sale to Poland).
(268) Gen. Accounting Office, GAO/NSIAD-96-65, supra note 10, at 1 (showing offsets as a condition initiated by a purchaser); Marvel, supra note 101, at 36 (identifying "reverse piggyback offsets" initiated by third parties).
(269) U.S. Gen. Accounting Office, GAO/NSIAD-99-35, Defense Trade: U.S. Contractors Employ Diverse Activities to Meet Offset Obligations 5 (1998) [hereinafter Gen. Accounting Office, GAO/NSIAD-99-35],
(271) In a U.S. procurement, the manufacturing of the F-35's jet engines was directed to be awarded to two U.S. manufacturers--General Electric and Pratt Whitney--on the grounds that it was required to maintain the defense industrial base, and that it was required to lower prices through competition. Penny Wise, Pound Foolish F-35 Alternate Engine Recommendation Should be Rejected by Congress ... Again, Bartlett (February 14, 2012), http://bartlett.house.gov/news/documentprint. aspx?DocumentID=225080; Gen. Accounting Office, GAO-03-775, supra note 165, at 1.
(272) See Transparency Int'l, Defence Offsets, supra note 11, at 14 (cronyism and nepotism as incentives for bribery in award of offsets).
(273) See Leigh & Evans, Al-Yamamah, supra note 3; Pallister, supra note 3, at 9 (discussing reimbursement of bribes in A1 Yamamah contracts); Feinstein, supra note 74, at 83-84.
(274) Transparency Int'l, Defence Offsets, supra note 11, at 14, 17.
(275) See Leigh & Evans, Al-Yamamah, supra note 3; Pallister, supra note 3, at 9.
(276) OECD Bribery in Public Procurement, supra note 73, at 45.
(277) BAE Systems has not admitted to or been found guilty of bribery in the A1 Yamamah scandal. In February 2010, it entered into an agreement with the SFO admitting to bribery in Tanzania, but not in Saudi Arabia. OECD Phase 3 Report, supra note 231, at 15. In March 2010, BAE Systems pled guilty in the U.S. to making false statements, but did not plead guilty to bribery. Press Release 10209, Dep't of Justice, BAE Systems PLC Pleads Guilty and Ordered to Pay $400 Million Criminal Fine, (Mar. 1,2010), available at http://www.justice.gov/opa/pr/2010/March/10-crm-209.html. Such a result occurred, in no small part, because in December 2006 Saudi officials threatened to cease co-operation with the U.K. on intelligence and security issues if the U.K. continued to investigate allegations that BAE Systems had bribed Saudi officials to the A1 Yamamah contract. In response to this threat, the SFO terminated its investigation in the A1 Yamamah case. Despite calls by the OECD, among others, for the U.K. to re-open the A1 Yamamah investigation, the SFO has declined to do so. OECD Phase 3 Report, supra note 231, at 15.
(278) Feinstein, supra note 74, at 76; Leigh & Evans, Al-Yamamah, supra note 3; see The Money Converter, supra note 3, for conversion from U.K. pounds to U.S. dollars.
(279) Feinstein, supra note 74, at 75, 79-80.
(280) Id. at 83; Leigh & Evans, Al-Yamamah, supra note 3.
(281) Leigh & Evans, Al-Yamamah, supra note 3; see The Money Converter, supra note 3, for conversion from U.K. pounds to U.S. dollars.
(282) Feinstein, supra note 74, at 83-84; Pallister, supra note 3, at 9; see DISAM, supra note 170, at 9-20 (showing that the U.S. government is the "banker" for offset transactions in FMS).
(283) Transparency Int'l, Defence Offsets, supra note 11, at 14, 17.
(284) Id. at 17.
(285) Id. at 14.
(286) OECD Bribery in Public Procurement, supra note 73, at 46; Lockheed's Commission Payments to Obtain Foreign Sales: Report to the Chairman, Subcomm. On Banking, Housing and Urban Affairs, 95th Cong. 7 (1977) (statement of Robert F. Keller, Acting Comptroller General) (stating that bribes paid overseas were usually made as a grease payment, a payment to secure competitive advantage, or a payment in response to extortion).
(287) See Transparency Int'l, Defence Offsets, supra note 11, at 17 (bribes for false invoices); Verma, supra note 117, at 1 (identifying concern over receipt of unearned banked offset credits).
(288) See Verma, supra note 117, at 1.
(289) Feinstein, supra note 74, at 180.
(292) Eriksson, supra note 33, at 30; see also Dep't Of Commerce, Twelfth Study, supra note 33, at Appendix F (showing offsets as part of procurement decision).
(293) Gen. Accounting Office, GAO-04-954T, supra note 62, at 1.
(294) U.S. Gen. Accounting Office, GAO-01-278T, Defense Trade: Observations on Issues Concerning Offsets 1-2 (2000) [hereinafter Gen. Accounting Office, GAO-01-278T].
(295) See Gen. Accounting Office, GAO/NSI AD-96-65, supra note 10, at 4 (discussing the difficulty to satisfy United Arab Emirates' offsets due to their crediting only an offset's profit).
(296) Dep't of Commerce, Sixteenth Study, supra note 10, at 3. Penalty clauses may, for example, increase the amount of a required offset obligation, reduce the value of a signed export sales contract, or require liquidated damages. Id. Half of the offset agreements signed by U.S. companies in 2010 have penalty clauses. Id.
(297) Gen. Accounting Office, GAO-01-278T, supra note 295, at 3.
(298) See Transparency Int'l, Defence Offsets, supra note 11, at 16 (showing discretion and secrecy in offsets).
(299) See Bialos, supra note 30, at 96 (illustrating past unsuccessful OECD offset discussions).
(300) See Code of Conduct on Offsets, supra note 153, at 1 (discussing the Code of Conduct promulgation in 2011). The OECD currently has 34 members, 20 of which are E.U. Member States. See http:// www.oecd.org/about/membersandpartners (OECD members); http://europa.eu/about-eu/countries/ index_en.htm (EU Member States).
(301) Code of Conduct on Offsets, supra note 153, at 3-4.
(302) Id. at 3.
(303) Id. at 4.
(304) Transparency Int'l, Due Diligence and Corruption Risk in Defence Industry Offset Programmes 31 (2012) [hereinafter Transparency Int'l, Due Diligence]; see also OECD Bribery in Public Procurement, supra note 73, at 67 (showing the need for increased transparency to increase detection risk for corrupt activity).
(305) Code of Conduct on Offsets, supra note 153, at 3-4.
(306) See UNCITRAL Legal Guide, supra note 100, at 72-73 (discussing the valuation of technology transfer based on a lump-sum payment, or a payment of royalties that is linked to projections of future production, sales or profits).
(307) Transparency Int'l, Due Diligence, supra note 305, at 36.
(308) See OECD Bribery in Public Procurement, supra note 73, at 67 (illustrating that the lack of transparency in national security procurements fails to provide a deterrent to corrupt activity).
(309) Transparency Int'l, Due Diligence, supra note 305, at 35.
(310) See Dep't of Commerce, Sixteenth Study, supra note 10, at 5, 27 (defining indirect offset); Dumas, supra note 17, at 21 (showing offsets as providing discounts for offset items, or merely constituting secondary purchases).
(311) See Dep't of Commerce, Sixteenth Study, supra note 10, at 5, 27 (defining direct and indirect offset).
(312) Proposed costs or prices constitute protected source selection information. FAR [section] 2.201 (2012).
(313) DFARS [section] 225.7304(c) (2012); DoD 5105.38-M, supra note 72, at C6.3.9.I (providing that the U.S. Government is prohibited from disclosing cost or pricing data to a purchasing government without the consent of the vendor).
(314) Office of the Under Secretary of Defense for Acquisition, Technology and Logistics, Offsets of Foreign Military Sales: FMS Offsets and Other Issues Affecting FMS Procurements Frequently Asked Questions (FAQs), http://www.acq.osd.mil/dpap/cpic/ic/offsets_of_foreign_military_sales. html#q4 (last visited Jul. 30, 2012); DoD 5105.38-M, supra note 72, at C22.214.171.124.
(315) 10 U.S.C. [section] 2306a(c) (2012); 41 U.S.C. [section] 254b(c) (2012).
(316) See 2009 Directive, supra note 74, at art. 52, Annex V (discussing the requirement for tenderers who are not contracting authorities to publish subcontract awards above a certain threshold).
(317) In U.S. federal contract award notifications, only the name of the prime contractor is required for publication. FAR [section] 5.207(a) (2012). However, this is not the case in E.U. defense procurements. 2009 Directive, supra note 74, at art. 52, Annex V.
(318) For criticism of offset recipients, see Taylor, supra note 29, at 38 (discussing offsets as subsidies for politically favored parties); Markowski & Hall, supra note 58, at 49 (discussing offsets as subsidies to support inefficient local subcontractors); Markusen, supra note 50, at 74 (discussing offsets redistributing production to second-best producers in foreign countries); Transparency Int'l, Defence Offsets, supra note 11, at 14 (discussing corruption in offsets).
(319) Code of Conduct on Offsets, supra note 153, at 4.
(320) Id. at 4; Transparency Int'l, Due Diligence, supra note 33 (2012).
(321) Dep't of Commerce, Sixteenth Study, supra note 10, at 3.
(322) See Seguin, supra note 37, at 11, 16, 30-31 (providing the weight of offset, price and technical criteria in Poland's procurement for fighter aircraft in 2002, and the final calculus that resulted in the F-16 winning the Polish procurement).
(323) Gen. Accounting Office, GAO-04-954T, supra note 62, at 1; Gen. Accounting Office, GAO/ NSIAD-96-65, supra note 10, at 2; Eriksson, supra note 33, at 30.
(324) Gen. Accounting Office, GAO-04-954T, supra note 62, at 1; Brauer & Dunne, supra note 13, at 2.
(325) See Gen. Accounting Office, GAO-04-954T, supra note 62, at 1.
(326) See Eriksson, supra note 33, at 30 (offsets used as an award criterion in E.U. Member States).
(327) See Dep't Of Commerce, Twelfth Study, supra note 33, at Appendix F (showing multipliers in use in countries such as Poland and the Netherlands).
(328) Id. (showing multipliers in use in the Netherlands).
(329) Gen. Accounting Office, GAO-04-954T, supra note 62, at 1; Georgopoulos, Revisiting, supra note 53, at 36.
(330) Redlich & Miscavage, supra note 39, at 387.
(331) See Dep't Of Commerce, Twelfth Study, supra note 33, at Appendix F (providing offset multipliers of up to 30 in the Netherlands).
(332) See U.S. Gen. Accounting Office, GAO/NSIAD-93-184, Military Sales to Israel and Egypt: DOD Needs Stronger Controls Over U.S.-Financed Procurements 33-34 (1993) (discussing the problem of offset value inflation).
(333) Code of Conduct on Offsets, supra note 153, at 4. The Code of Conduct qualifies appropriateness by referring to efficiency, practicality, and economic or technical appropriateness. Id.
(334) National security grounds are not specifically referred to in the Code of Conduct, but they are implicit given that Article 296 of the Treaty Establishing the European Community allows member states to exempt military equipment from Community regulation. Id.; Consolidated Version of the Treaty Establishing the European Community art. 296, Dec. 29, 2006, C 321 O.J. 175.
(335) See Dep't of Commerce, Sixteenth Study, supra note 10, at 27 (depicting a pie chart on direct and indirect offsets).
(336) Green Paper, supra note 59, at 4-5 (discussing how offset requirements address security of supply and technological superiority concerns); Markowski & Hall, supra note 58, at 45-46 (discussing how offsets use local content requirements to source a portion of the contract value in the buyer's territory); Markusen, supra note 50, at 68 (discussing how transfer of technology is typical in offset packages).
(337) See Bialos, supra note 30, at 51 (Poland and Romania directing offset work to state-owned or controlled entities in order to keep them solvent); Gen. Accounting Office, GAO/NS1AD-99-35, supra note 270, at 5 (1998) (addressing how Asian government directed subcontract work to specific companies in order to spread offset work among multiple contractors in the same industry).
(338) Heuninckx, Procurement Directive, supra note 60, at 2 (providing examples of E.U. Member States abusing Article 346 of the Treaty on the Functioning of the European Union to exempt their defense procurements from regular E.U. procurement rules); Eriksson, supra note 35, at 5 (showing a general difficulty in justifying any offset on national security grounds); Edwards, supra note 59, at 3 (showing difficulty of defining national security interests).
(339) Aris Georgopoulos, The Commission's Interpretive Communication on the Application of Article 296 EC in the Field of Defence Procurement, 16 Pun. Procurement L. Rev. 3, NA43, NA45 (2007); Nicolas Pourbaix, The Future Scope of Application of Article 346 TFEU, 20 Pub. Procurement L. Rev. 1, 1, at 7 (2011); see also ManTech Telecomms. & Info. Sys. Corp. v. United States, 49 Fed. Cl. 57, 75 n.27 (Fed. Cl. 2001) (stating that judicial deference is at its apogee in matters pertaining to the military and national defense, including matters pertaining to military requirements in defense procurements).
(340) Dep't of Commerce, Sixteenth Study, supra note 10, at 5, 27 (defining indirect offset); Taylor, supra note 29, at 40 (discussing justifications for indirect offsets).
(341) Georgopoulos, Revisiting, supra note 53, at 33.
(342) See Eriksson, supra note 33, at 16 (showing the variations in taxonomy among E.U. Member States regarding the definition of a direct offset).
(343) U.S. Sentencing Guidelines Manual [section] 8132.1(a) (2011); Ministry of Justice, supra note 205, at 31; OECD Related Documents, supra note 199, at 31.
(344) U.S. Sentencing Guidelines, Manual [section][section] 8B2.1(b)-(c) (2011); Ministry of Justice, supra note 205, at 27; OECD Related Documents, supra note 199, at 30.
(345) See Brian Loughman & Sibery, supra note 47, at 297-98 (asserting that offsets are singled out as one of the riskiest business practices for bribery and corruption in the aerospace and defense sector).
(346) The criteria for high corruption risk include conducting business in regions with a perceived high level of corruption such as Central Europe and the Middle East, conducting business in an industry that is high-risk for corruption due to its high transactional value and high level of interaction with government officials, and conducting business with intermediaries who must deal with politically exposed persons and prominent public officials. See Ministry of Justice, supra note 205, at 27 (listing the most common risk factors for corruption); Transparency Int'l, Corruption Perceptions Index, supra note 48, at 6-9 (listing the countries and geographical regions with high perceptions of corruption); Loughman & Sibery, supra note 47, at 296 (discussing the risks of corruption in the defense sector); Redlich & Miscavage, supra note 39, at 398 (discussing the extensive use of intermediaries who interact with government officials to form offset proposals).
(347) Press Release 12-534, Dep't of Justice, Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA, (April 25, 2012), available at http://www. justice.gov/opa/pr/2012/April/12-crm-534.html (discussing how the former Morgan Stanley director admitted to transferring a multi-million dollar ownership interest in a Shanghai real estate venture to a Chinese public official).
(349) Ministry of Justice, supra note 205, at 28; Loughman & Sibery, supra note 47, at 166, 170-171.
(350) Ernst & Young, supra note 44, at 2; Transparency Int'l, Due Diligence, supra note 305, at 4-5.
(351) Ernst & Young, supra note 44, at 2,4.
(352) Transparency Int'l, Due Diligence, supra note 305, at 14, 18.
(353) Press Release 10-209, supra note 278. BAE Systems pled guilty to conspiring to defraud the U.S., making false statements about its FCPA compliance program, and violating the Arms Export Control Act and International Traffic in Arms Regulations. Id.
(354) Loughman & Sibery, supra note 47, at 71, 166; Ministry of Justice, supra note 205, at 28.
(355) Loughman & Sibery, supra note 47, at 71, 166; Ministry of Justice, supra note 205, at 28.
(356) Transparency Int'l, Due Diligence, supra note 305, at 14; Loughman & Sibery, supra note 47, at 167; Ministry of Justice, supra note 205, at 28.
(357) Loughman & Sibery, supra note 47, at 170.
(358) Transparency Int'l, Due Diligence, supra note 305, at 16, 18-19; UNCITRAL Legal Guide, supra note 100, at 41.
(359) Transparency Int'l, Due Diligence, supra note 305, at 14; Ministry of Justice, supra note 205, at 31.
(360) Ernst & Young, supra note 44, at 10 (discussing the use of analytic software); Loughman & Sibery, supra note 47, at 124 (discussing the use of transaction testing); see also UNCITRAL Legal Guide, supra note 100, at 41-43 (discussing various methods to obtain documentation from business partners).
(361) Ernst & Young, supra note 44, at 10.
(362) OECD Related Documents, supra note 199, at 31; Ernst & Young, supra note 44, at 10.
(363) Sarah Johnson, Don 't Trust, Verify, CFO Magazine, Feb. 1, 2012, http://www3.cfo.com/ article/2012/2/ supply-chain_fcpa-third-parties-sec-compliance (discussing use of audit clauses in international industry); Romero, supra note 121 (discussing negotiation and expense required for audit of business partners).
(364) Ernst & Young, supra note 44, at 6.
(365) Loughman & Sihery, supra note 47, at 111.
(366) Ernst & Young, supra note 44, at 10 (discussing the use of analytic software); Loughman & Sibery, supra note 47, at 124 (discussing the use of transaction testing); see also UNCITRAL Legal Guide, supra note 100, at 41-43(providing various methods to obtain increased documentation from business partners).
(367) UNCITRAL Legal Guide, supra note 100, at 43.
(369) See Brauer, supra note 67, at 55 (dumping offset products on the world market); Markowski & Hall, supra note 58, at 47 (discussing the default on offset obligations).
(370) See UNCITRAL Legal Guide, supra note 100, at 43 (discussing the use of evidence accounts to deposit sales contracts, letters of credit, shipping documents, etc.).
(371) Loughman & Sibery, supra note 47, at 145, 147.
(372) Id at 144.
(373) Id. at 145.
(374) Id. at 151; Ernst & Young, supra note 44, at 24.
Lt Col Lambrecht serves in the U.S. Air Force Judge Advocate General's Corps, where he currently works as Chief of the Source Selection and Acquisitions Branch, Contract Law Field Support Center. He wishes to thank his wife, Nozomi, for her limitless understanding and support, and Dean Jessica Tillipman and Professor Susan Ringler for their insight and guidance. The views expressed in this paper are solely those of the author and do not reflect the official policy or position of the United States Air Force, Department of Defense or U.S. Government.
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|Author:||Lambrecht, Ryan J.|
|Publication:||Air Force Law Review|
|Date:||Dec 22, 2013|
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