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Greece - Corruption in Defense Procurement

Military procurement was long rumored to be rife with corruption. Many believe PASOK Defense Minister Akis Tzohatzopoulos in particular profited handsomely from large defense acquisitions. To cite one prominent example, Tsohatzopoulos is believed to have received huge bribes associated with the GoG's sole-source procurement of German Type 214 submarines in the 1990s. In fact, many Greeks credit the former Minister's role in this sale as a key factor in his new-found wealth. Unfortunately, the widely-held assumption that no military procurement takes place without corruption dogged the recent F-16 acquisition. The Ambassador repeatedly and in multiple fora had to explain that the Foreign Military Sales process left no room for such practices.

PM Karamanlis and MOD Spiliotopoulos made ending questionable acquisition practices a centerpiece of their defense reform efforts. In late 2005, the Defense Ministry introduced a series of reforms intended to enhance transparency and ensure that procurement decisions are made openly and solely based on military need. Although the government faces a struggle in its effort to change traditional practices and root out entrenched interests, there are signs that the Ministry of Defense is moving forward with the effort. The government's efforts to investigate allegations of corruption under the government of the socialist PASOK party have not been successful, with inquiries stymied by parliamentary jockeying and accusations that they are driven more by politics than by an impartial search for justice.

The situation faced by most U.S. defense firms smaller in size and power than Lockheed in still not good. One U.S. firm encountered the full force and complexity of the MoD's tendering procedures recently when it submitted its bid on a linear accelerator for military hospitals. The firm's bid not only had the best price (by 28%), but also received the highest combined price/technical score. Mysteriously, MoD canceled the tender at the last minute -- after the firm's price had been revealed -- only to announce its decision to "reinstate" the tender at a later date. Mission has raised this issue with MoD repeatedly, noting such practices are unfair to U.S. firms, which spend large amounts of money creating bids that meet very complex Greek tender specifications.

The payment of commissions to agents for both commercial and military tenders is legal and a common practice. This commission may be paid as a fixed amount or on a percentage basis, depending on the agreement between the company making the bid and its agent. It is up to the company quoting on public sector tenders to decide whether or not to show the commission as a separate expense or to include it in the overall bid price. As an alternative, a company may pay the commission out of its real profits, thus lowering its bid price.

Competition for defense contracts is very stiff. British, German and French advocacy appears particularly aggressive and political. European Governments exercise pressure through their EU political network as well. The U.S. Government continues to conduct advocacy, across a broad spectrum of decision-makers in Greece, for all of the major procurement programs. Russia has also laid the groundwork for achieving more defense sales in Greece.

In some cases, military and possibly commercial tender documents may state that no commission may be paid to an agent. Nevertheless, it is still legal to pay commissions out of the company's profits on the sale. No commission is payable on direct U.S. Government to Greek Government sales financed by Foreign Military Funds, (FMF), credits. However, a company many pay a success fee or commission out of its real profits on a separate agreement.

Commissions are payable on commercial military sales, (U.S. company to Greek Government), financed by FMF credits. Such commissions are subject to approval by the Greek Government. Commissions should always be shown on invoices for tenders involving spare parts and smaller orders for equipment/supplies. In these cases, the Bank of Greece will pay the foreign supplier for the parts in foreign exchange, but will pay the agent's commission in Euros.

One of the principal differences between European and American firms is that European companies often "bury" the commission. On the other hand, Americans usually feel compelled to show it as an expense, both for legal and internal accounting reasons. This can disadvantage the U.S. bidder vis-a-vis European competitors during the evaluation process since a U.S. bid which incorporates the commission may appear higher.

Despite recent OECD agreements on anti-bribery, analysts note that foreign competition in Greece often does not appear to observe restrictions similar to the U.S. Foreign Corrupt Practices Act. U.S. firms can, in part at least, neutralize this disadvantage by staging aggressive public affairs campaigns aimed at highlighting the potential benefits to Greece of their proposed offset packages and new technology offered. The benefit of an aggressive public affairs campaign is that it can reach the front line decision-makers as well as individuals at the political level.

In July 2010 the Greek parliament approved the creation of an investigative committee to probe two defense procurement contracts signed by the previous socialist government after a fiery debate that polarised members of ruling New Democracy and the main opposition Pasok. The vote came after two public prosecutors transmitted dossiers to parliament that suggested a possible dereliction of duty by PASOK defence ministers Akis Tsochadzopoulos and Yannos Papantoniou in the handling of the procurement of Russian TOR-M1 short-range anti-aircraft missiles and an order for six American TPQ-37 radars. Public opinion has long held that arms procurements entail huge kickbacks for government and military officials, but no evidence of such emerged during the investigation. In the case of the TOR-M1 missiles, the system was not compatible with the Greek air defence network, the deal was made by direct assignment and not a tender, and tens of millions of dollars in offsets never materialised. With the American radars, the PASOK administration agreed to unfavourable financial terms, paying nearly full price before delivery, and failing to collect penalties after two failed tests of the systems.

The influential Institute for Security and Defense Analysis [ISDA] said "Armaments procurement programs have a central position as "case studies" of the Greek state's excessive corruption and mismanagement in the repeatedly published accounts, reports and statements during the period of the last months. The volume of data, facts, allegations, speculations and even good-guessing created a context so that one could easily describe the contemporary Greek state's armament procurement as the "Kingdom of Kickbacks". As a result, armaments procurements have now been demonized as the unique source of evil and are being widely used as a scapegoat for the Greek state's notorious inefficiency and mismanagement of the last forty years. But the real facts are different. The EUR 30 billion (a rough estimate) that has been spent on armaments procurements during the last fifteen years represent only a fraction (about 10%) of Greece's national debt."

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Page last modified: 07-08-2012 13:22:15 ZULU