Defence deals: Licensing agents won't end corruption

The Press Trust of India recently reported the defence ministry’s move towards "a new defence procurement policy that will have fresh norms for blacklisting firms and engagement of agents".

This reassessment has been a long time coming, and yet, it remains easier said than done.

In 2001, the defence ministry had created new rules to allow, so far, illegal agents to register with the ministry and be permitted to openly represent arms firms. Agents had been banned after a number of corruption scandals that emerged in defence procurement cases, like for the purchase of Bofors artillery.

The November 2001 notification said, “The entire policy has been extensively reviewed recently with the objective of defining the scope, extent and the conditions within which such authorised representatives agents may be allowed to represent a foreign supplier or suppliers.”

 “While it is not the policy of government to encourage agents if the requisite supplies could be obtained and satisfactory after-sales service ensured, on reasonable terms, without their intercession, upon detailed examination the ministry of defense, concluded that there are advantages in involving authorised representatives agents.”

 “Such an involvement of authorised representatives agents would enhance transparency levels, provide the service headquarters with additional information about latest advances in sophisticated combat and non-combat technology. Authorised representatives agents would also be of assistance in trial evaluation of the systems, price negotiations, enhance the quality of after-sales service, resolving performance and warranty issues. Payments to Authorised RepresentativesAgents would be covered under the Income Tax Act and attract income tax which would be deducted at source.”

One can safely understand it to mean the ministry realised there was really nothing they could do to stop the operation of agents in defence procurement and thought it best to have them register to at least be able to regulate, monitor and check them.

It is also prescient of what an acquaintance associated with the defence industry expressed to me in frustration last month. “Here’s the thing in Delhi. It doesn’t matter who comes. The politicians can change, the bureaucrats can change, and the people in the uniforms can change. The only permanent institutions in this city are the agents. They’ve been here forever and aren’t going anywhere. And they know where all the minefields are and where all the skeletons are buried.”

Delhi is full of people who’ll tell you, “Ho jayega ji. Karwa denge.” The defence agent is no different, no less ubiquitous within the domain except for the scale at which he or she operates.

Anyway, no one registered.

Why would they? Registering as an agent would only bring them liabilities. First, they would obviously be declaring themselves as agents, middlemen, brokers –  slanderous professions in the defence business. This would bring them under the scrutiny of all sorts of government agencies – IT, Customs, ED, everyone – for all their transactions, past and future.

And then they would have to declare their income as agents and (cough) pay taxes on them, like everyone else.

Here’s how agents operate in this city. For example, some of them have a front business that peddles high-end/luxury goods, much of which are either exported or imported. At least, that’s what they claim.

This allows them access to the right circles [This is important. You don't need a front to get into these circles. You could be born into them or go to the right school/college. Lots of permutations and combinations] and justifies the transfer of funds internationally, being used as the paper pretext for all kinds of payments that may need to be made in India.

Work for them is intelligence gathering in terms of keeping track of the status of their files, as well as, the competition's and how to get them to move to the next level. Or not. All of this requires a fair bit of schmoozing.

But in most cases the money paid to agents for their services doesn’t even come into India, simply because there’s no need for most of it to be brought here. It could simply stay in convenient offshore accounts, accruing interest. Try tracking money in bank accounts in random branches abroad.

So the big question for the defence ministry is how to incentivise disclosure and registration by agents? How would the ministry ensure compliance by agents, when for all practical purposes their activities are carrying on swimmingly well, thank you very much?

By itself, there’s no reason to criminalise a person for being an agent. But an agent could be criminally liable for corruption if they influence decision-making in the ministry on the basis of illegal gratification to government officials or, for instance, if they evade taxes on their income, which, in this case, would be gains from a banned profession [Fun fact: Notorious American gangster Al Capone was ultimately only convicted of tax evasion on his ill-gotten wealth. Not for other, more violent crimes].

But corruption and tax evasion are already criminalised by specific laws that prescribe a punishment. The problem is simply that there’s never been a successful prosecution.

Part of the reason is that illegal gratification can also come in many, many remarkably creative forms that can make it very difficult to prove. It could be an employment offer in a couple of years, perhaps to a dependent, or payment of academic fee for studies aboard or even just a leg up in the right direction for them. Cash is silly. Cash is for amateurs. And most payments are also simply made abroad, anyway.

Blacklisting is actually a symptom of the ministry's frustration in dealing with corruption cases in defence procurement. Agents might be involved in such cases, but there has never been a conviction.

When a company is blacklisted, it is the armed forces who are affected, delaying their acquisitions to a slow crawl, denying them the products of companies that are typically one of a handful in the world that have the capital and skill to develop cutting edge technology, and increasing prices by reducing competition.

Neither criminalising agents nor blacklisting companies serves any purpose. And the cases of agents behind corruption in defence procurement, while deplorable, cannot be treated differently than under laws already in place in India, which have, so far, failed to lead to a successful prosecution.

But perhaps this is largely because a successful prosecution would require nailing the demand side, as well.

And that is another story, altogether.