CORRUPTION RISKS AT THE RUSSIAN MINISTRY OF DEFENCE. · 2017. 4. 27. · Secrecy 3 Restrictive business practices 4 Conflicts of interest 4 Objectives and research methodology 6 Conflicts

CORRUPTION RISKS AT THE RUSSIAN MINISTRY OF DEFENSE 1

CORRUPTION RISKS AT THE RUSSIAN MINISTRY OF DEFENCE. CONFLICTS OF INTEREST

This report presents Transparency International — Russia’s research into corruption risks at the Ministry of Defence of the Russian Federation. The focus lies on corruption associated with unresolved conflicts of inter-est. The study is based solely on publicly available infor-mation and on interviews with experts on state pro-curement. The research does not touch upon classified expenditures or other data constituting state secrets. The report cites examples of potential corruption among public servants at the Russian Ministry of Defence and its subordinate institutions. These incidents result from unresolved conflicts of interest. The report concludes that a mechanism of internal control over conflicts of interest has not yet been fully introduced, leaving opportunities for misconduct on the part of all parties involved in state procurement.

The report provides recommendations for the Russian Ministry of Defence on reducing corruption risks and im-proving the regulation of conflicts of interest.

CORRUPTION RISKS AT THE RUSSIAN MINISTRY OF DEFENCE. CONFLICTS OF INTEREST

Transparency International — Russia Report

Moscow, 2017

CONTENTS

Introduction 2

Secrecy 3

Restrictive business practices 4

Conflicts of interest 4

Objectives and research methodology 6

Conflicts of interest at the ministry of defence 8

Case study: Ministry of Defence and Sukhoi Civil Aircraft JSC 8

Case study: Vladimir and Maria Buzdygans 10

Revolving doors 12

Case study: Georgy Forsov and Aksion-Holding 12

Case study: Ruben Markosyan and PKB Rio 13

Government procurement 14

Risks of conflicts of interest at the ministry of defence 16

Violating prohibitions and circumventing restrictions 16

Signing state procurement contracts with companies whose beneficial owners are located in offshore territories 17

Cases: foreign and offshore shareholders 18

Ministry of defence officials declare incomplete income data 19

How the ministry of defence prevents conflicts of interest 19

Conclusion 21

Recommendations 21

2 CORRUPTION RISKS AT THE RUSSIAN MINISTRY OF DEFENSE

INTRODUCTION

In 2015 Transparency International Defence & Security experts put togeth-er the Government Defence Anti-Corruption Index of the G20 countries. Countries were arranged into six bands depending on the level of corruption risks in the defence sector. Russia, along with India, Indonesia, South Africa and Turkey, fell into in Band D, which corresponds to a «high level of risk» (among the G20, higher levels of risk only exist in Brazil, China and Saudi Arabia). The authors of the report note that Russian defence institutions have a limit-ed system of checks and balances, and are not transparent or accountable to the public. 1

It is not only official government authori-ties in Russia that are not transparent, but also Russian companies working in the de-fence sector. In the same year, Transparen-cy International Defence & Security experts assessed the 163 largest global defence companies in terms of the availability of infor-mation about their anti-corruption and ethical regulations. Of the Russian companies, only two private ones (RTI Systems and GAZ OJSC) fell into Band E, which means that both companies have «strong limitations on the availability of information». The rest, which are all state companies, such as UralVagon-Zavod, Almaz-Antey, KB Priborostroenie,

MiG, Sukhoi, etc. fell into Band F, signifying an «almost complete lack of information». 2

In 2016 official assessments of anti-corruption compliance in the companies associated with the Russian Ministry of Defence revealed 260 deficiencies and violations. 3

Three main factors form fertile ground for corruption risks at the Russian Ministry of De-fence and its subordinate institutions: secrecy, restricted competition and unresolved con-flicts of interest.

1 Government Defence Anti-Corruption Index 2015 / Transparency International UK // http://government.defenceindex.org/downloads/docs/GI-G20-Results-web.pdf2 Defence Companies Anti-Corruption Index 2015 / Transparency Internarional UK // http://companies.defenceindex.org/docs/2015%20Defence%20Companies%20Anti-Corruption%20Index.pdf3 Analysis data review conducted in 2016, audits the requirements of anti-corruption legislation in military management bodies, the troops (forces), organizations of the armed forces of the Russian Federation and field reception offices of the Main Personnel Directorate of the Ministry of Defence, website of the Ministry of Defence of Russia, http://stat.mil.ru/download/doc/morf/military/files/2016-12-15_review.docx.


SECRECY

In 2015, defence spending in the federal budget accounted for 3.8% of Russia’s GDP, in 2016 it increased to 4.4%. In 2017, 3.2% of Russia’s GDP has been earmarked for de-fence expenditure. 4 This is the least transpar-ent section of the budget — two-thirds of it is classified (by comparison, the National Econ-omy allocation is 7% classified, the Education allocation is 4.3% classified, the Healthcare allocation is 3.6% classified, and only 0.1% of the Culture allocation is classified).

Back in 2012, while serving as prime minister and running for president, Vladimir Putin wrote in a policy article, «Excessive secrecy has led to reduced competition, inflation of prices for military products, and super profits which are allocated not towards the modernization of production, but to-wards the pockets of individual businessmen and officials. Wherever it is not detrimental to our national interests in terms of the pro-tection of state secrets, we should abandon the practice of restricted tenders. Defence procurement should be under close public

scrutiny and penalties for violations should be tightened.» 5

However, contrary to this statement, the pro-portion of classified expenditures in the fed-eral budget increased between 2011 and 2016 to a total of 14.7%, or 2.7% of GDP. 6 At the same time, defence spending in the fed-eral budget doubled in 2011. This is without taking into account the right of the Minister of Finance to reallot 10% of the federal budget to defence spending without the ap-proval of the State Duma.

In 2016, federal expenditures on national defence amounted to 3.805 trillion rubles, of which only 1.112 trillion rubles are open to the public. Taking into account the spe-cific proportion of this particular section of the budget, this means it is only 29.2% transparent. 7

Thus, less than a third of defence spend-ing is available for public scrutiny. On the one hand, some degree of non-transparency is

4 Titov D. Budget: defence expenditure has increased and expenses on economics have fallen//Economics and life. № 5.2017.https://www.eg-online.ru/article/336532/.5 Putin V. Be strong: guarantees of national security for Russia//Rossiyskaya gazeta, 20.02.2012 https://rg.ru/2012/02/20/putin-armiya.html.6 Zatsepin V.B. Laws, secrecy and statistics: recent developments in Russian defence budgeting / 4th Global Conference, Forum for Economists International. De Zilveren Toren, Amsterdam, 1 June 2014 http://iep.ru/files/news/zatsepin_01.06.14.pdf.7 Transparency (degree of openness) of the federal budget/Information agency TS VPK, data on 12/01/2016 http://fcs.vpk.ru/cgi-bin/uis/gk.cgi/Gkf/FB?part=trance&year=2016.


expected in relation to national defence, but on the other hand, it forms a breeding ground for corruption.

RESTRICTIVE BUSINESS PRACTICES

The corruption risks associated with the one third of defence spending expenses that are available to the public primarily relate to the restriction of competition, when the customer selects an independent con-tractor not on the basis of the results of a tender, but on the basis of tender committee decisions that are not always guided by transparent criteria. This method is provid-ed for by the law «On the Federal Contract System» (Federal Law № 44) and by the law «On Procurement for Certain Types of Legal Entities» (Federal law № 223) and can even be applied in situations where there are sev-eral potential suppliers competing with each other on a certain market. Customers in such a situation may arrange favorable procure-ment requirements for a friendly supplier.

According to the Ministry of Economic Devel-opment, the share of contracts with a single supplier under law Federal Law № 44 stood at 23%, and the share under Federal Law

№ 223 was 36% across the entire state procurement system. 8 Even if we assume that the share of defence procurement is the same as the average across the entire system, then we can conclude that about a third of defence spending falls under the umbrella of non-competitive procurement.

Given the secrecy and restrictions on compe-tition, meaningful analysis can only be carried out in respect of no more than one fifth of the total volume of defence spending.

CONFLICTS OF INTEREST

Corruption is highly adaptable. It evolves together with the authorities and the society. According to Levada Center sociologists, in the early 2000s Russians were most concerned about such forms of corruption as bribery, extortion and officials’ links with organized crime. In the mid 2010s, so-called «soft corruption» came to the fore: cronyism, nepotism, featherbedding and fraudulent in-flation of administrative authorities’ budgets. 9

Procurement from a single supplier im-pedes competition «Soft corruption» is a general term for corrupt practices based on the informal influence

8 Report on the results of compliance monitoring of the Federal law dated July 18, 2011, Federal law № 223 « On Procurement Of Goods, Works and Services Certain Types of Legal Entities» over 2016/Ministry of economic development Website, http://economy.gov.ru/minec/resources/913b3a7a-2ed0-498f-9d92-65b6c49de8ed/223fz.pdf. 9 Corruption in the system of state power/ Levada Center website, 18.11.2014 http://www.levada.ru/2014/11/18/korruptsiya-v-sisteme-gosudarstvennoj-vlasti/


Total expenditures of Federal budget under «National Defence» section in 2016

Open part of expenditures of the Federal budget for this section

3,805 bln rubles

ALMOST

1/5

1,112 bln rubles

Almost a third of total spending on national defence is open to public According to to Ministry of Economic Development of the Russian Federation, a third part of all procurement is single-sourced.

of military budget can be evaluated

Procurement from a single supplier does not imply bidding procedures, which hamper competitiveness.

MILITARY EXPENDITURE

SE

CR

ET

NONCOMP

ETITIV

E C

OM

PETITIVE


of government officials on decision mak-ing in their favor or in favor of their affiliates (relatives, friends and subordinates). Its main manifestation lies in conflicts of interest. The law «On Combating Corruption» (Federal Law № 273) defines it as a situation in which the direct or indirect personal interests of an official can affect the proper, objective and im-partial performance of his/her official duties.

Employees must notify employers of conflicts of interest or the likelihood of their appearance, as soon as they become aware of them.

The employer, in turn, is obliged to take measures to prevent or resolve conflicts of interest (Part 3, Article 11, Federal Law № 273). In itself, the appearance of a conflict of interest is not considered a violation, it is the failure to report and resolve it that is regarded as a corruption offense for which dismissal is guaranteed with the wording «due to a loss of confidence.»

OBJECTIVES AND RESEARCH METHODOLOGY

The research was conducted by the Trans-parency International — Russia Center for Anti-Corruption Studies (Transparen-cy International — Russia) from November 2016 to February 2017.

The study includes public source information. Transparency International — Russia experts examined only public domain information that is not classified and does not relate to sensitive and secret decisions.

Pursuant to a comprehensive research meth-odology, Transparency International — Russia analysts held a series of interviews with ex-perts in the field of government procurement and the allocation of budgetary funds.

The first stage of the study was to find and organize data on conflicts of interest with-in the Ministry of Defence system using mass media publications.

To identify contractors, clients and the affiliations between them in relation to state procurement and the distribution of funds in the area of defence, the Transpar-ency International — Russia team examined the Unified Information System for State Procurement, the Unified Portal for the Rus-sian Budgetary System, and the Expenditure, Budget and Contract Commitments project. 10

To check compliance with prohibitions and re-strictions imposed on officials, and to search for connections between legal entities and in-dividuals, we used data from the Unified State Register of Legal Entities.

10 The project «Expenditure, Budge And Contract Commitments» http://fcs.vpk.ru/cgi-bin/uis/gk.cgi/ClassifierEditor/View/BudgetCharge?part=public#


To investigate the links between individuals and defence-related decisions, we studied government agency websites, information on income and property and the database of court decisions and decisions of adminis-trative bodies concerning violations in public procurement at the Ministry of Defence and its subordinate structures.

All collected data were independently reviewed by Transparency International — Russia experts, systematized and present-ed in this report. Based on our analysis, we provide recommendations for the Russian Ministry of Defence on reducing corruption risks and improving the regulation of conflicts of interest.


CONFLICTS OF INTEREST AT THE MINISTRY OF DEFENCE

In accordance with Article 6 of the law «On Public Service» (Federal Law № 58), military service is considered a type of federal public service. Therefore, enlisted men are subject to the provisions of the law «On Combating Corruption» (Fed-eral Law № 273), which deals with conflicts of interest.

For failure to prevent and/or resolve conflicts of interest to which they are party, military service people are to be dismissed for loss of confidence.

Preventative regulation of conflicts of in-terest is not a common practice among Russian bodies of authority, and the Min-istry of Defence is no exception. However, given the special legal status of its officials, in their case, it may lead to more serious consequences, including undermining the country’s defence capabilities. When allocating government contracts and taking decisions related to the sale of state property and the financial and economic activities of enterprises and organizations, unresolved conflicts of interest may lead to material damage.

One of the most important measures for preventing conflicts of interest is their detection and anticipation from the outset. When dealing with state procurements, this means the stage at which the decision is taken to acquire goods (including the pro-cess of replacing existing goods), and at

which the priority options are identified and the procurement is planned.

CASE STUDY: MINISTRY OF DEFENCE AND SUKHOI CIVIL AIRCRAFT JSCВIn January 2017, Russian Defence Minister Sergei Shoigu authorized a study on replac-ing Tu-154, Tu-134 and Il-62 M passenger aircraft with the new Russian models. This was reported by the Kommersant newspa-per with reference to unidentified sources close to top Russian military officials, as well as several top managers in the aircraft in-dustry. The Sukhoi Superjet 100 (SSJ-100), a 100 seater, new generation aircraft, was named among the prospective models. It was developed, and is manufactured and sold by Sukhoi Civil Aircraft JSC (SCAC), which also provides post-sale technical support. The Ministry of Defence is expected to order at least 20–25 aircraft. In addi-tion to profits and increased utilization at the aircraft factory in Komsomolsk-on-Amur, this order will allow SCAC to promote


the SSJ-100 model more actively on interna-tional markets. 11

The decision on this purchase is still pend-ing, but even now, there are two detectable potential conflicts of interest.

1. Ruslan Hadzhismelovich Tsalikov holds the position of First Deputy Minister of Defence of the Russian Federation. His

responsibilities include judicial issues, legal work and financial control. His son Daniel Ruslanovich Tsalikov is Head of the Sales Support Department at SCAC. The poten-tial conflict of interest lies in Tsalikov’s ability to lobby on behalf of a company at which his close relative is a paid employee.

2. Sergey Dmitrievich Baynetov is Acting Chief of Aviation Safety of the Russian Armed Forces. This office is subordinate to the Chief of General Staff and is in charge of inter-institutional control over the ac-tivities of state aviation safety personnel. In accordance with the procedure for in-teraction between the state aviation safety authorities in the Russian Federation, the head of the service is expected to submit annual proposals to reduce the accident rate of state aircraft. 12

3. His daughter, Tatiana Sergeevna Baynetova, is the contracts director at SCAC. 13 Thus, if Mr. Baynetov proposes to replace the existing fleet of the armed forces because of safety concerns, a conflict of interest arises in relation to him performing certain functions of public administration

11 Safronov, I., Kouznetsova, Zharkova-Djordjevic A. The Defence Ministry calls upon new civilians//Kommersant, 20.01.2017 (http://www.kommersant.ru/doc/3196318?stamp=636228534961314819).12 Order of the Minister of Defence, the Ministry of Internal Affairs of the Russian Federation, the Ministry of the Russian Federation for Civil Defence, Ministry for Emergency Situations, Federal Security Service, Federal Customs Service and the Russian Defence Sports and Technical Organization - (Voluntary Association for Assisting the Army, Air Force and Navy) № 18/27/15/14/71/9 dated January 20, 2010, Moscow (https://rg.ru/2010/03/05/polyot-dok.html)13 Tatiana Baynetova’s Facebook page https://www.facebook.com/tatyana.baynetova (in the «Current work» section she indicates: Sukhoi Civil Aircraft Company, Contracts Director).

Ruslan Hadzhismelovich Tsalikov , First Deputy Minister of Defence of the RF


with the company at which his daughter is employed. The SSJ-100 is already being operated by the Ministry of the Interior and the Ministry of Emergency Situations. 14

4. Mr. Baynetov is responsible for control over these agencies as regards aviation safety. This means he has a conflict of inter-est: his daughter works for a company that provides paid services to agencies at which he has authorities.

Thus, right away we see that two high-rank-ing officials of the Ministry of Defence — First Deputy Minister Ruslan Tsalikov and Head of Air Safety Sergei Bajnetov — may have a personal interest in the Ministry purchasing SSJ-100 aircraft.

CASE STUDY: VLADIMIR AND MARIA BUZDYGANS

On February 1, 2017 Vladimir Danilovich Buzdygan was appointed Director of the De-partment of Culture at the Ministry of De-fence (until January 2017 he was Adviser to the Department of Culture at the Ministry of Defence). At the same time, his daugh-ter, Maria Vladimirovna Buzdygan works for the same Department of Culture. To resolve this situation, one of the employees should either be dismissed or transferred from one department to another. The situation cannot be resolved by transferring Maria Buzdygan to an entity that is directly subordinated to the Department of Culture of the Ministry of Defence.

Judging by official Ministry of Defence doc-uments, the ministry’s top officials are aware of similar cases. 15 The responsibility of enlist-

Tatiana Baynetova on her prom party in Financial Academy. Her father Sergey Baynetov is on the left (photo taken from Tatiana’s Vkontakte page)

14 Annual report of Sukhoi Civil Aircraft JSC for 2015 http://ir.superjet100.com/assets/files/library/reports/annual_reports_ru/Annual_Report_GSS_2015.pdf15 Overview of the analysis carried out in the 2016 audit of compliance with anti-corruption legislation in the command and control authorities, military units (forces), organizations of the armed forces of the Russian Federation and external field reception offices of the Main Personnel Directorate of the Russian Ministry of Defence // Ministry website, http://stat.mil.ru/download/doc/morf/military/files/2016-12-15_review.docx.


Ministry of defence of the Russian Federation

Minister of Defence of the RF

Ruslan Tsalikov,First Deputy Minister of Defence of the RF

Sergey Baynetov,Acting head of Flight Security Service of the armed forces of the RF

АО «Sukhoi Civil Aircraft»

Daniel Tsalikov,Head of sales support department

Tatiana Baynetova,Director of Contracts

Responsible for the judicial work and financial control

Prepares a draft report for Minister on aircraft-related accidents

• Participates in quality control of the new airplanes

• Removes old airplanes from service

• Organizes the accident investigations

Purchase of 25 SSJ 100 planes for

father chief

son

father

daughter

×25 404 billionrubles


ed personnel to resolve conflicts of interest is stipulated under federal law. The Ministry of Defence adopted procedures on conflicts of interest with respect to relatives. However, as the example with the Buzdygans shows, it appears that even the central administration of the Ministry of Defence fails to comply with these regulations.

REVOLVING DOORS

When a person transfers from the private sector to government structures, he or she usually retains a personal relationship with his or her former employer and colleagues. These relationships can be either friendly or hostile. In any case, they might interfere with the im-partial execution of official duties in public ser-vice. When moving from the public to the pri-vate sector, people usually preserve ties with state structures, and can use them in favor of their new employer.

The migration of workers between the public and the private sectors is known as the «re-volving door».

Having a positive or negative attitude to-wards a former employer is not considered a personal interest under current legislation as it does not result in income-generating

opportunities for the public servant, their family members or the organizations with which he/she is affiliated financially or oth-erwise.

The Russian legal framework regulates the phenomenon of the «revolving door». In accordance with the «Guidelines for the Application of Model Conflicts of In-terest in the Armed Forces of the Russian Federation», from March 12, 2015 collab-oration with a former employer falls under the definition of a conflict of interest. 16

However, the extensive system of economic entities under the Ministry of Defence as well as the level of integration of private compa-nies in state procurement create objective difficulties in this area.

CASE STUDY: GEORGY FORSOV AND AKSION-HOLDING

On May 7, 2015 the Ministry of Defence signed a contract for over 7 million rubles with Aksion-Holding Izhevsk Moto-Plant OJSC (Taxpayer Identification Number 1826000616) for the installation of telemetric equipment at a military base in Crimea. Aksion-Holding was the only party to participate in the e-auction for this contract. 17

16 Guidelines for the Application of Model Conflicts of Interest in the Armed Forces of the Russian Federation (http://mil.ru/anti-corruption/meth_materials/more.htm? id = 12010680 @ cmsArticle)17 Contract № 1770425226115000489 dated 07.05.2015. Electronic Auction № 0173100004515000472 (notification from 03.04.2015) to maintain, install and launch telemetry processing facilities: installation and launch of a small receiving and recording station 14B325, and connecting it to the antenna complexes at Military Base 09703-l, 31IC in Feodosia.


Georgiy Lvovich Forsov has been Director of the Ministry of Defence’s Public Procure-ment Department since December 2014, and according to his own official biography, which is available on the ministry’s web-site 18, he served as Deputy Director of Ak-sion-Holding Izhevsk Moto-Plant OJSC from July to December 2012. The membership of the auction committee for this procurement was formed based on an order issued by Forsov, and it consisted of employees from his department.

In view of this, Georgy Forsov, Head of Public Procurement at the Russian Ministry of De-fence, shows signs of being compromised by a conflict of interest as reflected in his collaboration with a former employer.

CASE STUDY: RUBEN MARKOSYAN AND PKB RIO

It is not uncommon for former public servants to be given jobs in commercial organizations that act as suppliers under government contracts. The regulation of this situation is rather weak.

There is a so-called «cooling-off» period during which a resigned public servant cannot take a job in a company that is linked to his former employer through contractu-al obligations without undergoing special

procedures to resolve the conflict of interest. In accordance with Article 12 of Federal Law № 273 «On Combating Corruption in Russia», the «cooling-off» period is two years.

Even if all of the procedures stipulated under the law are complied with, includ-ing the «cooling off period», the «revolving door» situation remains ethically ambiguous, albeit legally acceptable under current law. Reserve Rear Admiral Sergey Belenov, former Deputy Commander of the Pacific fleet, is now the First Deputy General Director of PKB RIO CJSC, a commercial organization that supplies navigation equipment for ships of the Pacific fleet. He was not in charge of public procurement in his previous position.

Formally, there are no signs of a conflict of interest in this situation. However, it is likely that an officer of such a rank may keep per-sonal and working relationships with military commanders of the fleet, and the officials who are now responsible for public procure-ments in the Navy could have been his former subordinates.

Sergei Belenov’s colleague Ruben Aleksan-drovich Markosyan, a retired colonel and another ex-deputy commander of the Pa-cific fleet in charge of engineering, defence construction and quartering, was appointed to the same construction bureau (PKB RIO CJSC) almost immediately after his resig-

18 Ministry of Defence website, http://structure.mil.ru/management/details.htm? id = 11891508 @ SD_Employee.


nation from military service in 2011. Despite the statutory two-year restriction on inter-actions with the previous employer, Mr. Markosyan took part in the supply of equip-ment to the Ministry of Defence. For example, under Markosyan, PKB RIO CJSC participat-ed as the sole bidder in State Procurement Tender № 0173100000812000902 and won in January 2013. The public contract was worth more than 54 million rubles.

Back in 2009, Nikolay Telitsyn, Director of the Pacific Center for Retraining Service Personnel at the Far Eastern State Techni-cal University, directly recommended mili-tary officers who had contact with civilian organizations to seek employment in these organizations after retiring. 19 This indicates a clear breakdown in the understand-ing of the prohibitions and restrictions relating to conflicts of interest and serves as evidence that these corruption risks remain underestimated.

GOVERNMENT PROCUREMENT

In the public procurement system both non-competitive allocation (procurement through a single vendor) and competitive allocation (via electronic auction) of public contracts is possible. In the latter case, the objectivity of the Competition Commission

members is of crucial importance, and could be jeopardized if there is a conflict of interest. The client can include additional preferenc-es for his favored supplier in the technical specifications. The supplier is only supposed to indicate the absence of conflicts of inter-est in the application form, and the employer has no obligation to verify it.

In accordance with item 9, Part 1, Article 31 of Federal law № 44 «On the Contract System,» all participants in state procurement must avoid conflicts of interest between participants in the procurement and the client. The law is clear on what exactly is meant by this requirement. Thus, the concept of «con-flict of interest» extends to cases in which the officials of a client company who are directly involved in the procurement process find themselves in a situation that jeopardizes competition in state procurements.

Procurement participants, regardless of the existence or absence of circumstanc-es that suggest a conflict of interest, must submit a declaration on their compliance with the requirements of item 9, Part 1, Article 31 of Federal law № 44. This can be done ei-ther by submitting a separate document with the application form for participation in a state procurement, or by ticking the appropriate box in online documentation.

19 An Officer Dismissed from the Army can Become a General Without Epaulettes//PrimaMedia.ru, 16.01.2009 http://primamedia.ru/news/89224/


Even if there is no actual conflict of interest, the bidder’s failure to declare this circum-stance constitutes grounds for the dismissal of its application for failure to comply with the requirements of the law.

Despite the active monitoring mechanism for conflicts of interest in the public procurement process, there are plenty of examples of it being bypassed when the personal interests of Ministry of Defence employees are involved.


RISKS OF CONFLICTS OF INTEREST AT THE MINISTRY OF DEFENCE

In addition to instances of direct conflicts of interest, we have identified several typical situations that provide opportunities for them to arise.

VIOLATING PROHIBITIONS AND CIRCUMVENTING RESTRICTIONS

Like all government employees, military personnel are forbidden from engaging in any other paid activity (except scientific and creative activities), conducting entrepreneurial activity and participating in the management of business entities (with the exception of trade unions, as well as housing, garage, gardening, etc. cooperatives).

We have identified twenty commanders of military units who are also directors of commercial enterprises in public registries or individual entrepreneurs.

In addition, according to the Unified State Register of Legal Entities, six managers of federal state unitary enterprises and state unitary entities that are subordinate to the Ministry of Defence, are founders, members or managers of commercial enter-prises. This is forbidden under the law «On State and Municipal Unitary Enterprises» (item 2, Article 21, Federal Law № 161).

1. Andrey Pavlovych Polyakov (Taxpay-er Identification Number 183300212252), General Director of Federal State Unitary Enterpise «Engineering Center of the Minis-try of Defence of the Russian Federation» is a shareholder in the construction company, Stroitelnaya Kompaniya LLC (Taxpayer Identi-fication Number 7731594190).

2. Valeriy Ivanovich Bolbot (Taxpay-er Identification Number 502707158053), Head of the Federal State Unitary Enterprise «Сonstruction and Renovation Agency of the Moscow Military District» is CEO and a shareholder in RemStroyInvest LLC (Tax-payer Identification Number 7714905826).

3. Sergey Aleksandrovich Sergeev (Tax-payer Identification Number 770970411642), Director of the Federal State Unitary organiza-tion “Hotel Management of the Ministry of De-fence of the Russian Federation”is director of Garrison Hotel № 1 in Moscow (Taxpay-er Identification Number 7726190234).


4. Bejan Pavlovich Tkebuchava, Head of Federal State Unitary Enterprise «906 SU (m)” (Taxpayer Identification Number 774311486970) is general director of Con-struction and Mechanization Management № 3970 CJSC (Taxpayer Identification Number 5001043535).

5. Anatoly Vasilyevich Krasnenko is head of State Unitary Enterprise «Construction and Installation Department № 3» and a share-holder in SpetsStroy LLC (Taxpayer Identifica-tion Number 5020041928).

6. Andrei Stanislavovich Stalevskij (Tax-payer Identification Number 712600012991), Interim Chief of Federal State Unitary Enter-prise «SpetsStroy-Engineering at SpetsStroy of Russia» is a shareholder in Aviamaster LLC (Taxpayer Identification number 5077026868).

All this suggests that defence officials often ig-nore the restrictions and prohibitions described above.

SIGNING STATE PROCUREMENT CONTRACTS WITH COMPANIES WHOSE BENEFICIAL OWNERS ARE LOCATED IN OFFSHORE TERRITORIES

Some companies that receive state contracts from the Ministry of Defence have a complex ownership structure, and the chain of ben-

eficiaries often leads abroad, including to offshore territories. We have identified ten entities with foreign shareholders that obtained state contracts from the Ministry of Defence in 2016.

The participation of companies with foreign shareholders in state procurement, particu-larly those from offshore territories, creates ample opportunity for the concealment of potential conflicts of interest on the part of government officials. Russian public offi-cials may stand behind the foreign companies and foreign shareholders, trying to conceal their participation in public procurement. Some countries have public business regis-tries that allow you to identify the beneficial owners. Other countries, including many offshore jurisdictions, do not provide for this possibility. This makes it extremely difficult or even impossible to conduct public inves-tigations into potential conflicts of interest, and even with the official participation of law enforcement agencies, such investigations are infeasible.

Other companies use schemes with confusing chains of ownership, for exam-ple: a contractor company is set up by an entity that was set up by another compa-ny, and the third company was, in turn, established by yet another company. Such chains can have up to 15 links. Compa-nies registered in Cyprus often employ this kind of scheme. The Cyprus registry allows the management of a company to be iden-


tified as well as its owners. However, its beneficial owners could be other offshore companies that do not disclose the owners of the companies in their jurisdictions, or special legal agencies that run multiple com-panies through nominal directors.

CASES: FOREIGN AND OFFSHORE SHAREHOLDERS 20

1. The beneficial owner of Smart Energo Trade CJSC « (Taxpayer Identification Number 7731402290) is Mathias Co. Limited, a com-pany registered in Cyprus. Contracts from the Ministry of Defence: four for a total amount of 1.031 billion rubles.

2. Among the beneficial owners of Vel-mash-Service LLC (Taxpayer Identification Number 6025018018) are Excelsior Invest-ments Ltd. (registered in Cyprus) and Spree Cross Holdings Inc. (registered in the Brit-ish Virgin Islands). Contracts from the Min-istry of Defence: two for a total amount of 142.3 million rubles.

3. Among the beneficial owners of ANO DPO AEROGRAD KOLOMNA DOSAAF Russia (Taxpayer Identification Number 5022998303) is Assets Solution Ltd., a company reg-istered in the Seychelles. Contracts from the Ministry of Defence: two contracts for a total amount of 432.6 million rubles.

4. The beneficial owner of Lyu-Max-Cen-trum LLC (Taxpayer Identification Number 7736202760) is Lumex Instruments Limited, registered in Cyprus. Contracts from the Min-istry of Defence: two for a total amount of 71 million rubles.

5. The founder of Liebherr-Rusland LLC is Liebherr International AG, registered in Switzer-land. Contracts from the Ministry of Defence: six for a total amount of 243.8 million rubles.

6. Among the beneficial owners of Standard Chistoty LLC (Taxpayer Identification Number 7720749981) is Adore, an international com-mercial company registered in British Indian Ocean Territory. Contracts from the Ministry of Defence: six for a total amount of 132.4 mil-lion rubles.

7. The founders of Kärcher LLC (Taxpay-er Identification Number 7705581614) are Kärcher Beteiligungs GmbH and Alfred Kärch-er Gmbh and Co. KG, registered in Germany. Contracts from the Ministry of Defence: four for a total amount of 132.4 million rubles.

8. Among the final beneficiaries of the KAMAZ PJSC (Taxpayer Identification Number 1650032058) is the company Avtoin-vest Limited, registered in Cyprus. Contracts from the Ministry of Defence: three for a total amount of 916.7 million rubles.

20 We obtained information about the state procurement contracts signed by the above mentioned companies from the Unified Information System for State Procurement (http://zakupki.gov.ru).


9. The founder of RM-Terex LLC (Taxpay-er Identification Number 7707533574) is Construction Equipment Corporation BV, registered in the Netherlands. Contracts from the Ministry of Defence: eight for a total amount of 148.9 million rubles.

10. The founder of ROLF MOTORS LLC (Taxpayer Identification Number 7715586594) is Delans Limited, registered in Cyprus. Con-tracts from the Ministry of Defence: one for the sum of 20.5 million rubles.

This list shows that a significant part of 3.2 bil-lion rubles from the budget of the Ministry of Defence flowed to offshore jurisdictions, and it is extremely difficult to identify who the final recipient of the money is. It is not a formal violation per se, however, corruption risks are evident in this situation.

MINISTRY OF DEFENCE OFFICIALS DECLARE INCOMPLETE INCOME DATALike any ministry, the Ministry of Defence pub-lishes senior officials’ declarations of income, spending and assets on its website. The list of positions subject to income, expenses and assets declaration is approved by Minister of Defence Order № 217 of April 5, 2014.

The Ministry of Defence is the only federal ministry that releases anti-corruption declara-tions without specifying individuals’ posi-tions, although the form for the publication of this information was set out by the Ministry of Labor (Order № 530 N dated October 7, 2013), and it requires that these columns be filled in. The failure to declare this informa-tion in the form not only contravenes the es-tablished norms, but also severely impedes public scrutiny over the ministry’s activities and makes the system of publishing anti-corruption declarations less effective.

HOW THE MINISTRY OF DEFENCE PREVENTS CONFLICTS OF INTERESTThe latest version of the Guidelines on the Application of Model Conflicts of Inter-est in the Armed Forces of the Russian Feder-ation was published in 2015. The document contains clear definitions and recommenda-tions concerning conflicts of interest when taking personnel decisions. However, no other situations in which conflicts of interest might arise are considered in the document. 21

In fact, the Ministry of Defence artificially excludes the area that is most economically significant and vulnerable to corruption from

21 Guidelines for the Application of Model Conflict of Interest Situations in the Armed Forces of the Russian Federation (http://mil.ru/anti-corruption/meth_materials/more.htm? id = 12010680 @ cmsArticle)


the scope of regulation, i. e. state procurement. Furthermore, the guidelines do not take into account possible conflicts of in-terest in the areas of state property sales, supervision, licensing, grants, representing the interests of the state in court, expert review, etc.

In its «Review of Typical Conflict of Interest Situations in the Public Services of the Rus-sian Federation and their Resolution» 22, the Ministry of Labor treats conflicts of inter-est with a much wider scope. This document applies to all civil servants, including members of the armed forces in relation to areas that are not covered by the provisions and docu-ments of the Ministry of Defence.

As mentioned, the guidelines consider coop-eration with a former employer to be a conflict of interest. However, the relevant section

of the document only describes employment after resignation from public service.

The review prepared by the Ministry of Labor recommends that government employees who are entrusted with any kind of authority over relations with companies in which they worked before joining the public service notify a representative of their employer and their immediate supervisor about the potential for a conflict of interest in writing. The repre-sentative is recommended to assess whether the civil servant’s relationship with the former employer may affect the impartial execution of his/her official duties.

If the probability of this is high, it is recom-mended that the public servant be removed from his duties in relation to the former employer.

22 Russian Labor Ministry Letter № 18-2/1/10/2088 of October 15, 2012


CONCLUSION

We have provided clear examples of possible corrupt practices among officials of the Ministry of Defence and subordinate organizations. They all result from unresolved conflicts of interest, which can cause significant damage when carrying out state procurements.

Despite the fact that the president has voiced theoretical support for the transparent alloca-tion of public contracts in the defence sector through competitive supplier selection pro-cedures, the practice of conducting procure-ments through a single provider is still very common. This severely reduces the scope for public scrutiny over state procurements.

Although federal legislation stipulates that it is the duty of Ministry of Defence service people to tackle conflicts of interest, internal compli-ance monitoring has not yet been fully imple-mented and is inefficient. In the field of public procurement, this lack of control leaves op-portunities for misconduct on the part of both the customer and the contractor.

Having analyzed the state procurement system, we have formed a list of recommen-dations for Ministry of Defence officials and companies involved in public procurement with the Ministry of Defence. These rec-ommendations are aimed at the preventive settlement of conflicts of interest.

RECOMMENDATIONS

1. Ban from public tenders companies with shareholders that are foreign entities registered in offshore jurisdictions on the list maintained by the Russian Ministry of Finance or in countries that lack public business registries and where it is impossible to identify the beneficial owners of companies.

2. Introduce public registers of service personnel who have left active service and hold management positions at companies that do business with Ministry of Defence in-stitutions, in order to help prevent conflicts of interest.

3. Enhance the monitoring of violations of the Ministry of Defence’s employment regu-lations after discharge from military service.

4. Ban former service people who have broken the employment regulations from applying for government jobs.


5. Extend the list of areas in which conflicts of interest may arise in relation to the per-formance of functions of public admin-istration in the Review of Typical Conflict of Interest Situations in the Public Services of the Russian Federation and their Reso-lution (Russian Ministry of Labor Letter №. 18–2/1/10/2088 dated October 15, 2012), and the Guidelines for the Application

of Model Conflict of Interest Situa-tions in the Armed Forces of the Russian Federation dated March 12, 2015.

6. Establish and protect the conditions necessary for independent public monitoring of compliance with anti-corruption standards at the Russian Ministry of Defence


Irina Borogan Journalist, Deputy Editor of Agentura.ru, writer«The New Nobility. Essays on the History of the FSB»«The Battle for Runet. How the Authorities Manipulate Information and Spy on Each and Every One of Us» and others (co-authored with Andrei Soldatov).

Everything that takes place inside the Ministry of Defence is traditionally hidden from the citizens of the country under a dense shroud of secrecy which, in legal language, is called a state secret. One can be sent to prison for disclosing state secrets. For those journalists who are not content with singing the praises of the General Staff, it is almost impossible to obtain any information about the military. The military always have a convenient excuse: state secrets.

Meanwhile, more and more of our taxes are spent on defence, and not on education or healthcare. And this expenditure is growing — federal budget expenses on defence have more than doubled since 2011. How can we understand where these funds are going exactly and whether the Ministry is tossing the money into the wind that billows the sails of the snow-white yacht of some contractor’s daughter?

The Transparency International-Russia Report deals with corruption risks at

the Ministry of Defence, and it sheds some light on the problem. Without touching upon the realm of state secrets and exclusively using open sources of information, they have been able to demonstrate what happens in the public procurement system, how likely it is that this money ends up in offshore jurisdictions, and which generals have children in companies that supply equipment to the Ministry of Defence.

The concept of the «revolving door» is not a very popular term in our country. It describes a rather common phenomenon, when an official who leaves public service joins the private sector and vice versa, using his or her connections to promote commercial interests.

It is hard to imagine how much time the Transparency team spent on studying examples of public procurement and state registers. However, they have managed to identify twenty military officers whose official positions in the army are no object to them serving as directors of commercial enterprises or being individual entrepreneurs at the same time, while military servicemen are officially forbidden from engaging in entrepreneurial activities.

This is not the only constraint that is being ignored when contracts are being signed with the Ministry of Defence. a few years ago, the president announced the deoffshorization policy aimed


at compelling Russian companies to register in Russia and pay taxes. According to the Transparency report, not everyone took note of this. The report highlights that many companies receiving contracts from the Ministry of Defence, «… have a complex ownership structure, and the chain of beneficiaries often leads abroad, including to offshore territories.» The list of these companies, of course, is presented for all to see. The researchers have come to the striking conclusion that, «3.2 billion rubles from the budget of the Ministry of Defence flowed, at least partially, to offshore jurisdictions.»

For those who do not trust the conclusions of international organizations, the report lists its sources, so skeptics can double-check for themselves.

The report concludes with simple and articulate recommendations for the Ministry of Defence that could quickly reduce corruption risks. One of them is to bar companies with shareholders registered in offshore jurisdictions from participating in tenders.

This publication has been prepared by the independent non-profit organization Transparency International — R Center For Anti-Corruption Research and Initiatives. The Center is a Russian non-commercial organization which holds accreditation as a national branch of the international anti-corruption network Transparency International.

The independent non-profit organization Transparency International — R Center for Anti-corruption Research and Initiatives has been included in the register of non-profit organizations that act as foreign agents by the Russian Ministry of Justice.

Center for Anti-Corruption Research and Initiative Transparency International — Russia

Rozhdestvenskiy Bulvar, 10/7, Building 1, Room I Moscow, Russia 107031

+7 (495) 915-00-19 www.transparency.org.ru [email protected] facebook.com/transparencyinternationalrussia

Documents

CORRUPTION RISKS AT THE RUSSIAN MINISTRY OF DEFENCE. · 2017. 4. 27. · Secrecy 3 Restrictive business practices 4 Conflicts of interest 4 Objectives and research methodology 6 Conflicts