Third-Party Due Diligence to Mitigate Risks Posed by Overseas Defense Contractors

Earlier this month, the U.S. Department of Justice settled a fraud case with an overseas defense contractor that resulted in the contractor’s forfeiture of $25 million.¹ In this instance, an Afghan-owned group of companies fraudulently billed the Department of Defense for logistics support in Afghanistan. This case follows on the heels of the notorious “Fat Leonard” bribery scandal involving dozens of senior U.S. Navy officers and a defense contractor in Southeast Asia.² These cases highlight the corruption and bribery challenges confronting the Defense Department when dealing with countless overseas third-party vendors, implications of which can severely undermine the department’s ability to carry out its global missions. Much of these risks stem from the nature of the modern defense industry, notably the opacity of defense procurement transactions, the growth of third parties and the globalization of defense supply chains.^{3, 4, 5, 6, 7}

The Department of Defense and its prime defense contractors can minimize and possibly eliminate these risks through a rigorous due diligence screening of their overseas suppliers, vendors and other third-party partners. This process includes:

• Developing a risk-based approach to screen third parties based upon an objective understanding of regional and other relevant risk factors.
• Conducting the prescribed level of due diligence on overseas third parties prior to any engagement.
• Leveraging regionally knowledgeable and foreign language-capable investigators to ensure effective due diligence efforts.
• Leveraging technology to efficiently and consistently conduct a third-party compliance program, ensuring data integrity in the event of an audit. 
• Conducting continuous monitoring of ongoing contracting relationships to maintain vigilance of an overseas third party over the course of the contract’s timeline.

Sources:
¹ Office of Public Affairs, “U.S. obtains over $25M in forfeited funds from fraud and corruption in government contracting in Afghanistan,” U.S. Department of Justice, March 13, 2019. 
² Craig Whitlock and Kevin Uhrmacher, “Prostitutes, vacations and cash: The Navy officials ‘Fat Leonard’ took down”, Washington Post, 20 September, 2018, https://www.washingtonpost.com/graphics/investigations/seducing-the-seventh-fleet/. 
³ Joint Senate-House Letter to GAO, “DEFENSE ACQUISITIONS: Additional Guidance Needed to Improve Visibility into the Structure and Management of Major Weapon System Subcontracts,” http://www.gao.gov/assets/100/97156.pdf. 
⁴ Transparency International, Defence and Security, “License to Bribe? Reducing Corruption Risks Around the Use of Agents in Defence Procurement,” June, 2016, http://ti-defence.org/publications/licence-to-bribe-reducing-corruption-agents-defence-procurement/. 
⁵ https://www.bloomberg.com/news/articles/2011-09-01/the-f-35-s-global-supply-chain
⁶ Dana Hullinger “Transforming the Supply Chain Organization: Tackling the Biggest Supply Chain Risk of Them All,” April 15, 2016, https://olinblog.wustl.edu/2016/04/supply-chain-strategy-at-boeing-defense/. 
⁷ Hilary Hurd, “As Anti-Corruption Efforts Expand globally, the Defense Sector Remains an Outlier,” Defense One, 5 October, 2016, http://www.defenseone.com/ideas/2016/10/anti-corruption-efforts-expand-globally-defense-sector-remains-outlier/132137/.