The Big Payback: How Corruption Taints Offset Agreements In International Defense Trade Open Access
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A defense offset is an agreement between a defense vendor and a foreign government where the vendor commits to performing specific future business in the foreign country in exchange for the award of a defense contract. It is an incentive agreement that encourages the award of a defense procurement to a specific vendor. Offsets are an accepted practice in international defense trade; however, a recent investigation by the Serious Fraud Office in the United Kingdom has revealed that corruption in defense offsets is a significant problem. Specifically, investigation has shown that offsets have been exploited for bribes and sham transactions that potentially involve billions of dollars in trade. This thesis argues that because offsets have large monetary values, are not transparent, and involve complex transactions, they are highly vulnerable to being manipulated for corrupt purposes, and that the corruption revealed in the United Kingdom is not a one-off event. This is especially so because offsets are not effectively regulated by governments engaging in offset trade. To stop corrupt offset activity, the international community and defense industry need to create a new set of rules that better manage and police offset agreements. Specifically, the Organization for Economic Cooperation and Development should begin negotiating a convention of best practices for defense offsets so that offsetting governments can begin reforming their own laws, and so the international community can establish a set of offset norms. Additionally, defense vendors should increase their due diligence and auditing standards to deter and detect offset corruption, and to avoid criminal liability under the Foreign Corrupt Practices Act, U.K. Bribery Act, and other anti-corruption laws.