Fat Leonard: An Unexceptional Middleman

June 27, 2016

What a great plot for a Bond film. A 350-pound Malaysian contractor with an absurd alias seduces high ranking officers of the U.S. Navy with prostitutes, cash, and lavish entertainment, gaining sensitive information on U.S. ship movements in the Pacific while lining his pockets with the spoils from juicy defense contracts.  The only thing missing to turn the sorry escapades of the U.S. Navy’s 7th fleet into a top notch spy thriller is a nuclear missile-wielding North Korea connection…or at least that’s what Washington hopes.

Yet, the Glenn Defense Marine Asia scandal is anything but fiction.  Earlier this month, “Fat Leonard”, AKA Leonard Glenn Francis, chalked up yet another spectacular fall from grace when Rear Admiral Robert Gilbeau admitted he had made false statements to federal investigators. He is now the 11th and highest ranking officer to have been brought down by the weight of greasy side-deals from the corpulent, corporate middleman.

But as the investigations continue, the real scandal is how unexceptional the story really is.  Unscrupulous middlemen or “agents” are found at the heart of many defense scandals, and changes in the global arms market are only creating more opportunities for misbehaviour.  Agents or “middlemen” can of course play a vital role in global defense transactions – from exploring business opportunities in new regions to assisting with logistics, licensing, and legal advice, but a lack of oversight can create huge corruption risks. In the case of Fat Leonard, a lack of due diligence enabled an agent acting on behalf of Singaporean company Glenn Defense Marine Asia to cost the Navy an estimated $35 million in forged invoices as ships were redirected to particular ports for servicing, with several senior Navy officials sharing sensitive information on ship movements in exchange for bribes.

While anti-bribery legislation has strengthened in many parts of the world, there is a shocking paucity of regulation by governments and companies on activities by agents. This creates huge corruption risks.  In 2013 over 90 percent of reported US Foreign Corruption Act (FCPA) cases involved third party intermediaries. And despite companies identifying the use of agents as one of the main risks in company bribery and corruption, Transparency International’s Defence Companies Anti-Corruption Index found that in only 8 percent of defense companies is there public evidence of an adequate focus on agents in diligence processes.

In some cases, agents are actually engaging in bribery on behalf of the company. A leaked report by Debevoise & Plimpton, which had been commissioned by German manufacturer Ferrostaal, found an estimated £1.18 billion in “questionable payments” were made to agents in jurisdictions such as Portugal, Greece, South Korea, and Indonesia to secure contracts between 1999 and 2010.  In other cases, it’s not the defense companies, but importing countries, who are at fault. We found that in some jurisdictions, importing governments require bidding companies to work with particular agents, such as like family members of a government bigwig or someone with connections with the military. This makes it virtually impossible to find a local partner that doesn’t present a conflict of interest.

But despite these risks, exporting governments are hardly taking aggressive action to tackle defense corruption either. In the last five years, 53 percent of U.S. exports of major conventional weapons have been delivered to markets we assess to have high or critical corruption risk in their defense institutions. And nor are France and the United Kingdom doing any better. They flog 71 percent and 80 percent of their defense exports respectively to corruption prone destinations. So much for global responsibility.

The U.S. national security implications of allowing a Malaysian national of dubious moral fortitude to infiltrate the highest ranks of the 7th Fleet are self-evident. But profiting from corruption in emerging economies is also damaging to U.S. interests. When those in power use the security institutions of government for their own self-interest, it can remove economic opportunity for the majority, divert vast sums of national wealth, and result in a whole spectrum of human rights abuses. Added to the risks of defense corruption fueling terrorism and proliferation, the selling arms to a future Gadaffi, Assad, or Ben Ali, is only sowing of the seeds of long term instability and conflict.

So as the world’s major powers consider ever stronger action to avoid the next Fat Leonard in their own systems, they should pay equal attention to corruption risks in other markets.  Global defense exporters could and should do a lot more to increase international, not just domestic, standards in defense procurement and ensure that deals don’t fuel corruption across states with vulnerable systems. Requiring that the recipient state has basic budget transparency and independent oversight over defense spending as a fundamental condition of export would be a first and very powerful step in the right direction. Secrecy and opacity are what enable corrupt agents to operate, and it’s time to end the flow of money to the world’s Fat Leonards.

 

Katherine Dixon is the Director Transparency International’s Defence and Security Programme.