MoD’s blacklisting policy for arms vendors has few of the promised changes

By Ajai Shukla

Business Standard, 24th Nov 16

Since the National Democratic Alliance (NDA) began governing in May 2014, two defence ministers, Arun Jaitley and Manohar Parrikar, have promised --- the latter repeatedly --- a “blacklisting policy” that penalises arms vendors for corruption; without reducing procurement choices by narrowing down the field of vendors.

On Tuesday, the defence ministry finally posted the new policy on its website, titled: “Guidelines of the Ministry of Defence for Penalties in Business Dealings with Entities” (hereafter Guidelines).

The Guidelines are notable mainly for their conservatism. They detail various kinds of corruption and lesser procurement offences; and describe two categories of penalties: suspension, and banning. They briefly mention “financial penalties”, but then say nothing more about them.

Serious differences within the ministry on the principles and modalities of blacklisting have been evident, not least from the delay in formulating Guidelines. Parrikar first promised a blacklisting policy by January 2015. It has taken another 21 months to promulgate Guidelines.

Even after the MoD’s apex Defence Acquisition Council (DAC) nominally cleared the Guidelines on November 7, hotly debated changes remained to be made. Promulgation has taken another 15 days.

Eventually, the Guidelines have little buy-in from the bureaucracy. All decisions relating to suspension or banning of a vendor must be made by “the competent authority”, which is the defence minister himself. There is no delegation of authority.

The problem of subsidiaries

The prime driver for a new policy is the February 2013 blacklisting of Italian defence conglomerate, Finmeccanica, by the United Progressive Alliance (UPA). This was done after company chairman, Giuseppe Orsi, was arrested in Italy for allegedly bribing Indian officials to win a contract for twelve AgustaWestland AW-101 VVIP helicopters. Dealings were also stopped with Finmeccanica’s 39 subsidiary companies, many of which are key defence suppliers to India.

These include marine systems vendor, Whitehead Alenia Sistemi Subacquel (WASS); radar and communications specialist, Selex Electronics Systems (ES); aerospace giant, Alenia Aeromacchi; armaments major, Otomelara; and helicopter maker, AgustaWestland. Key procurements were stalled, including the acquisition of Black Shark torpedoes from WASS for the Scorpene submarine.

Soon after taking over as defence minister in November 2014, Parrikar declared that companies that violated procurement norms should face “heavy financial penalties”, not blacklisting. Citing Finmeccanica, Parrikar asked: “Should we rule ourselves out of dealing with all of its 39 subsidiaries? There has to be a clear policy on that.”

The new policy specifies that a ban or suspension of an entity will not be automatically extended to its allied firms. It would only be extended “by specific order of the competent authority”.

It seems likely now that the defence ministry’s indefinite ban on Finmeccanica and all its allied firms could be whittled down to a five-year ban on AgustaWestland alone.

Financial penalties

Parrikar has pushed hard, but unsuccessfully, for financial penalties for corruption, in place of suspension or bans. On December 12, 2014 he had proposed: “How much you (the vendor) violated, pay the Indian government 4-5 times that, only then will you be permitted to participate in defence tenders.”

The new policy, however, barely touches on financial penalties. It starts out by mentioning “Levy of Financial Penalties and/or Suspension/Banning of business dealings with entities” to punish wrongdoing. However, the rest of the six-page policy mainly details conditions and procedures for “suspension” and “banning” of vendors. There is no further mention of procedures for levying “financial penalties”.

Ruled out, therefore, is the US-style option of “deferred prosecution agreements” (DPAs), in which the ministry grants amnesty to defaulting vendor companies in exchange for punitive cash penalties, an explicit or implicit acceptance of guilt, and their full cooperation in further investigations into the offence.

The CII had strongly urged the defence ministry to adopt DPAs in dealing with corporate corruption. It pointed out that corporations in the US paid $24.8 billion in fines during 2010-2014. Of that, $3.87 billion was for violating anti-corruption laws.

On the other hand, legal experts in criminal compliance warned against the practice of allowing companies to buy their way out of trouble. Evidently, the defence ministry bureaucracy has prevented Parrikar from having his way on this.

Suspension/banning

The Guidelines specify six offences that could lead to suspension or banning of a vendor. The first four causes, which involve corruption, would invoke bans of at least five years. These are (a) violations of contractual integrity pacts; (b) adopting corrupt/unfair means to win contracts; (c) misuse of agents or agency commissions, and (d) national security considerations.

There are two lesser offences, which would attract shorter bans: (a) non-performance or underperformance of contractual provisions, and (b) any other ground that is the defence minister deems to be in the public interest.

A key element of the new policy is the distinction it makes between suspension and banning. Suspension may be ordered “pending a full proceeding into allegations” against a company relating to those six violations, or when referring a case for investigation.”

The policy places a one-year cap on suspension of a company but, paradoxically, provides for extending the suspension, six months at a time, up to the maximum period of banning (which the Guidelines do not specify).

Banning, on the other hand, would be imposed “at least five years” if an entity is found guilty in a competent court of any of the first four offences involving corruption, or “on receipt of information regarding filing of charge-sheet in the court of law by CBI (Central Bureau of Investigation) or any other investigating agency.” 

Sherbir Panag, a Mumbai-based compliance expert, highlights the dichotomy between these two conditions --- one requiring an actual conviction, and the other merely the filing of a charge-sheet.

“This contradiction could be challenged as an absence of due process. After the defence ministry blacklisted Israel Military Industries (IMI), it challenged the ban in court alleging an absence of due process. The new policy could be similarly challenged as having different benchmarks for banning --- one requiring conviction, and the other only a charge-sheet”, says Panag.

Panag opines that the ministry would mostly suspend, not ban, companies suspected of wrongdoing. “Obtaining a conviction in court takes at least a decade. Even filing a charge-sheet takes years. Three years after AgustaWestland was banned, CBI has not yet filed a charge-sheet”, he points out.

Nor does the new policy recognise corruption investigations by foreign enforcement agencies, even though practically every alleged defence scam in India was unearthed abroad. A Swedish Radio investigation unearthed the Bofors scam in 1987; an Italian investigation revealed the AgustaWestland payoffs in 2013; a US Securities and Exchange Commission investigation this year unearthed payoffs to Indian officials by Embraer in the sale of three business jets to the Defence R&D Organisation.

“Corruption has two sides. For every vendor who pays a bribe, there is someone in the defence ministry who pockets it. What is needed is enforcement and investigation in our own country. Neither the ministry, nor its blacklisting policy, deals with that”, says Panag.