* Small- and medium-sized defense companies face potentially significant legal, regulatory, financial and reputational risks when engaging with overseas third parties. These risks stem from increased corruption exposure due to the nature of the defense industry, the limited resources smaller companies have at their disposal and the inherent challenges in screening overseas third parties.
While engaging with overseas third parties may be a necessity, it also potentially increases a company's exposure to corruption. Overseas contracted defense work is often carried out in countries known for this type of problem. Furthermore, the work is often in an industry that is highly susceptible to corruption, such as logistics or construction support. Overseas third parties can also have significant exposure to government officials, thus increasing the chances of bribery or other corrupt practices.
Properly identifying these risks prior to an engagement can pose a challenge for small- and medium-sized defense firms. Smaller companies often lack the resources to fund a large-scale due diligence program. Even if a company conducts a thorough third-party screening prior to an engagement, it may later run into problems due to a failure to monitor high-risk relationships after a third party is onboarded.
Smaller defense firms also face risk due to the inherent difficulty in performing due diligence on overseas third parties. They may lack the in-house foreign language expertise required for investigations. Adverse information can often only be found in local language media sources, while legal and regulatory databases are frequently only accessible to those who not only know how to find them but are also able to read the content. Regional cultural knowledge may also be required to provide important contextual understanding for any potential red flags identified.
Taken together, these challenges may increase smaller defense contractors' chances of running afoul of anti-bribery regulations, such as the U.S. Foreign Corrupt Practices Act. Stating that an alleged act of corruption was carried out by a third party, and not the firm directly, is not a strong defense, as the ongoing joint U.S.-U.K.-France investigation into alleged Airbus third-party bribery shows.
Despite these challenges, however, smaller defense companies do not have to break the bank by setting up elaborate and costly due diligence programs. Instead, they can develop a defensible and...