Economics / Politics / Reports

Defense contractors after the fall of the Soviet Empire: Ethical Darkness, Risk & Practical Solutions

Rhoads R. Cannon examines how defence contractors are under pressure in Eastern Europe – pressure to stay in business, but keep a clear ethical compass at the same time. 

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Raytheon’s Patriot Air Defence Missile System (Raytheon) 

The demise and fall of the Soviet Empire left an indelible handprint upon the Eurasian socio-political space. In particular, with the collapse of Soviet formal power, and with the opening of Soviet state archives, researchers have delved into the multifarious study of ethics and its impact upon the defense industry. Namely, what are the frameworks, conceptual tools, and biases impacting American partners and assets working within the East European arena?[1] Equally significant, which solutions have been overlooked, and how can they provide value to companies and individuals working within the region? In contrast to Milton Friedman’s claim that a firm’s sole purpose is the pursuit of shareholders’ returns, this analysis considers the social, national, and ecological wellbeing of disparate actors. Three underlying problems facing American defense companies in the post-Soviet expanse are consultant bribery and corruption, heightened inter-defense firm competition, and confidentiality breaches. Two solutions to addressing these interlocking trials are consultant selection and IP protection. While the US Foreign Corrupt Practices Act (FPCA) has guidelines against bribing foreign officials, present conditions necessitate a more robust response at every level.

The regional situation: Russia’s Rise

The Soviet system derived its legitimacy from the promise of building a modern, equitable, and sustainable civilization. But Soviet state apparatus retained its formal regional supremacy via expansive weapons systems within the People’s Democracies of Eastern Europe. With the collapse of the Soviet state via Gorbachev’s Glasnost (openness) and Perestroika (restructuring) reforms, the Empire crumbled and in its place arose newly democratic, but weak states like Czechoslovakia. Whether analyzing the Czech case or the rise of a newly independent Poland, it is clear that post-Communist elites retain decisive power. And since Cold War defense establishments used secrecy to maintain strategic supremacy, budgetary systems and military asset selloffs continue to plague the region – simply put, if you sell off state assets that never officially existed, how can you be prosecuted?.[2] For American defense companies, this presents an unique dilemma—how to conduct defense contract dealings in a region which has inherited post-Communist corruption?[3]

Consultant Bribery and Corruption

Scholars from Slavenka Drakulic to Vaclav Havel have collectively found that creating an ethical business standard in the region is a very challenging task. According to an executive within Raytheon International, an international defence contractor, the FCPA stipulates that, “management knows enough about a foreign government’s laws and directives that one cannot violate such laws.[4]” While Raytheon should be commended for providing defensive ballistic missile and radar systems (SM3-Block IB) to regional US allies,[5] their approach to background checks in recruiting is lackluster. As illustration, and although such an example is tied to the Middle East, employees of FLIR systems Inc. were investigated for contractual corruption vis-à-vis the Saudi Arabian government.[6] Equally important, according to Ukrainian journalist Tetyana Chornovil, is the lack of political will to address societal corruption within Ukraine.[7] In the face of recent Russian intervention in Crimea, and due to NATO’s perpetual budget constraints, the Ukrainian armed forces are undersupplied and ill trained for full-scale inter-state conflict with Russia.[8] What these disparate cases highlight, however, is that the selection of employees who understand both national local laws as well as the overarching FCPA is paramount. Specific solutions will be provided at the end of this report.

Elevated Inter-Defense Firm Competition

The annexation of Crimea has, undoubtedly, riled the international community and has reawakened European and American policymakers to the realities of a resurgent Russian Federation. Seen principally as very much a background to world politics after the fall of the Soviet Union, NATO’s Eastern flank is now the epicenter of European defense policy. This reality, in tandem with the ascendency of ISIS in the Middle East, has spurred US and international strategic investment in the defense industry. Unquestionably, the Russian Federation’s annexation of Crimea on March 18, 2014, stirred numerous East European states to seek defensive action. In fact, NATO detected dozens of Russian military aircraft entering European airspace in October 2014 alone.[9] By seeking more sophisticated weapons systems from American defense companies, Poland has emerged as a major consumer base for American defense hardware. Whereas two or three companies were in competition for defense contracts at the start of the 1990s, now eight or nine firms are vying for the same limited and lucrative Polish pacts.[10] Consequently, and with increasing pressure on domestic national budgets, defense companies are seeking international sales via countries in need of their high-technology products. When firm competition increases and the stakes of failure are high, there is a potential risk of rules circumvention.[11] Although firms such as Raytheon conduct rigorous ethics training via FPCA bi-annual conferences, etc., Europe’s new socio-political dynamic with Russia merits additional current affairs training. Specifically, contractors should be more cognizant of broad geopolitical trends, especially if their products are in the service of defending America’s allies against seen and unforeseen state and non-state threats. Instead of viewing ethics as a hurdle, the American defense industry and its European partners could employ heightened ethics training and oversight as an unifying construct—reinforcing regional ties.

Confidentiality and Cyber Security

            Information was the lifeblood fueling the Cold War rivalry between the Capitalist West and the Soviet Bloc. Presently, information espionage and intellectual property theft are the Achilles heels of both national governments and defense firms. It is advisable for the American defense industry to periodically critique and assess novel ways to ensure data security. A major ethical dilemma relates to the release of state and non-state secrets, and whether or not American contractors are at risk of cyber attack. Whereas the Cold War relied upon more traditional modes of privacy protection via hard-copy reports and tabulated information, today’s planners often rely upon the digital medium. According to Canadian think tank The Fraser Institute, following the Estonian government’s decision to relocate a Soviet-era war monument, cyber-spies contracted by the Kremlin unleashed “distributed denial of service” (DDoS) attacks crippling Estonia’s Internet support systems.[12] While it is true that such an attack was directed against a national government, similar attacks are a risk to the defense industry. It is an ethical imperative to ensure employee’s data and intellectual property are protected, and any haphazard treatment of such preventative measures could be hazardous to the bottom line.

Solutions: Consultant Selection, Intellectual Property Protections

A two-pronged approach would be expedient to American defense firms working alongside their East European partners. According to Transparency International (TI-UK), only 10% of companies properly disclose their anti-corruption systems. Lord Robertson, Former Secretary General to NATO, says that defense companies should have a zero tolerance policy to corruption. Corruption scandals can damage a firm’s reputation, disturb stock prices, create blacklists, and even incite prison terms.[13] First, instead of burying ethics training manuals within the bowels of company websites, firms could openly display these materials on their mastheads. Second, by working closely with NGOs such as Transparency International, the defense industry can utilize their findings to guide them ethically. Moreover, whilst firms such as Raytheon have exhaustively pushed ethics training, other firms can learn from their example and provide their employees with such frameworks. The defense industry’s cyber safeguards should be habitually expanded and updated to preserve confidential information. According the Georgetown Journal of International Affairs, cyber attacks have exploded in the past decade, and it would be foolhardy for American defense contractors to ignore this. In one example, Chinese national hackers compromised the U.S. Transportation Command (TRANSCOM), an agency that monitors all US troop deployments.[14] By vigorously updating computer platforms, by recruiting sound employees, and by aggressively educating staff on ethics dilemmas via novel ways, the defense industry will be in a better position within the 21st Century geopolitical arena. According to Sun Tzu: “the supreme art of war is to subdue the enemy without fighting,”[15] and it is time that defense planners and related industries, like energy firms, plot accordingly.

Rhoads R. Cannon

[1] Transparency International, “Is Fighting Corruption in EE Compromised?”  http://www.transparency.org/news/feature/eu_summit_eastern_europes_chance_to_show_its_anti_corruption_commitment, 2016

[2] Istvan Gyarmati, Post-Cold War Defense Reform: Lessons Learned in Europe and the United States (Potomac Books, 2002), Chapter 3.

[3] Transparency International, “Is Fighting Corruption in EE Compromised?”

[4] Raytheon Interview, January 31, 2016

[5] Raytheon, “US Missile Defense Systems International, ”http://www.raytheon.com/news/feature/rtn13_pas13a.html, 2016

[6]National Defense Magazine, http://www.nationaldefensemagazine.org/archive/2015/September/pages/USCrackingDownonDefenseIndustryCorruptionOverseas.aspx, 2016

[7] Atlantic Council, http://www.atlanticcouncil.org/blogs/new-atlanticist/ukrainian-anti-corruption-crusader-quits-government, 2016

[8] New York Times, http://www.nytimes.com/2014/10/08/opinion/in-war-time-corruption-in-ukraine-can-be-deadly.html?_r=0, 2016

[9] NATO, http://www.nato.int/cps/en/natohq/news_114274.htm?selectedLocale=en, 2016

[10] Raytheon Interview, January 31, 2016

[11] Raytheon Interview, January 31, 2016

[12] Alexander Moens, Cyber Security Challenges for Canada and the US, March 2015, Fraser Institute, p. 10.

[13] Transparency International, http://www.transparency.org/news/pressrelease/defence_companies_fail_anti_corruption_test, 2016

[14] Richard Enbody, “US Military Defense Systems,” Georgetown Journal of International Affairs (December 19, 2014), p. 2.

[15] Sun Tzu, The Art of War (Filiquarian, 2007), p. 3.

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