Military contracting

Military Contractors Return to Their Old Ways

In the 1980s and 1990s the big military contractors developed a reputation as some of the most corrupt major corporations in the United States. They were at the center of numerous scandals involving brazen overcharging in their dealings with the Pentagon, and they were often accused of providing defective equipment. Because the Defense Department was so dependent on them, these companies continued to be awarded lucrative contracts.

By the 2000s, the weapons makers were no longer in the spotlight as other industries such as the giant banks, Big Pharma, and the oil majors came to be viewed as the main corporate villains. After the arms companies got involved in arming the Ukrainian government to resist the 2022 Russian invasion, some ESG investors began to argue that the likes of Raytheon and Northrop Grumman should no longer be excluded from ethical portfolios.

A recent announcement by the Justice Department suggests that the military contractors have not changed their old ways. DOJ reported that Raytheon Company, now a subsidiary of a parent company known as RTX, is paying $950 million to resolve allegations in several categories.

First, it was accused of cheating the federal government by providing “false and fraudulent information to the DOD during contract negotiations concerning two contracts with the United States for the benefit of a foreign partner — one to purchase PATRIOT missile systems and the other to operate and maintain a radar system.” The deception caused the government to pay Raytheon $111 million more than it should have received. To settle this case, which is one of very few contract matters handled as a criminal offense, Raytheon paid a penalty of $147 million.

The second allegation involved additional instances in which the company provided “untruthful certified cost or pricing data when negotiating prices with the DOD for numerous government contracts and double billed on a weapons maintenance contract.” Raytheon paid a whopping $428 million to settle this civil action.

The third allegation involved bribes paid to a high-level official of the Qatari Air Force to obtain contracts. To resolve charges under the Foreign Corrupt Practices Act, paid a criminal fine of $230 million and other penalties. This and the other criminal charge were resolved through two deferred prosecution agreements, meaning that the company did not have to enter a guilty plea.

DOJ’s actions came less than two months after RTX paid $200 million to the State Department’s Directorate of Defense Trade Controls to resolve allegations of violating the International Traffic in Arms Regulations (ITAR) in connection with unauthorized defense exports.

Raytheon is not the only military contractor that has been slipping back into corrupt practices. Earlier this year, Sikorsky Services, a subsidiary of Lockheed Martin, agreed to pay $70 million to resolve allegations it was involved in a scheme to overcharge the Navy for spare parts and materials needed to repair and maintain the primary aircraft used to train naval aviators. Also this year, Boeing was fined $51 million for violating export control laws in its dealings with countries such as China. Last year, a subsidiary of L3Harris Technologies agreed to pay $21.8 million to resolve allegations that it violated the False Claims Act by knowingly submitting contract proposals in which the cost of certain parts was included twice.

Perhaps it is time to return the weapons companies to a prominent place in the corporate hall of shame.

The Dubious Rehabilitation of the Arms Industry

War always creates business opportunities, and the brutal Russian invasion of Ukraine is no different. Some of those opportunities are direct: producers of military hardware stand to benefit from increased orders from the Pentagon to replenish stockpiles of weapons being shipped to help the Kyiv government survive. Some are indirect: petroleum companies are profiting from the rise in world oil prices brought on by the war.

We are now seeing another kind of boon: corporations previously regarded as pariahs are now being viewed by some in a new light. Chief among these are the weapons producers. In addition to the new orders, these corporations are enjoying the fact that some investment advisors and analysts who previously shunned their shares are now arguing for their rehabilitation.

After the war began, two analysts at Citigroup led the way with the claim that “defending the values of liberal democracies and creating a deterrent” meant that weapons makers should be included in funds with the ESG—environmental, social and governance—label. Sweden’s Skandinaviska Enskilda Banken is allowing some of its funds to buy shares of military companies, reversing a position it adopted just a year ago.

Many ESG advocates are pushing back on this effort, but the fact that it is happening is an indication of the inconsistency in the motivations for ethical investing. Some ESG investors simply want to dissociate themselves from companies they find objectionable. Others hope that companies denied ESG approval will feel pressured to change their practices. A third category believe that firms such as fossil fuel producers are susceptible to legal risks that will undermine the value of their shares. And yet others may hope that disinvesting in odious companies will ultimately put them out of business.

These different categories are further complicated by the distinction between companies that are shunned because of their own practices and those which are part of an industry that is problematic.

One thing made clear by the war in Ukraine is that big military contractors are not headed for oblivion, as some hoped after the end of the Cold War. That applies not only to producers of conventional weapons that are now in great demand. Russia’s claims that it just tested a new intercontinental ballistic missile could spark a new nuclear arms race.

All this is not to say that we should be pinning a halo on the likes of Northrop Grumman and Raytheon Technologies. Even if some of their products are currently needed for the legitimate cause of helping Ukraine, much of what that do is still inherently objectionable. A long-term, large-scale build-up of weapons spending is not what we need.

Moreover, the major military contractors have long rap sheets involving repeated violations of the False Claims Act in their dealings with the Pentagon as well as bribery, export control transgressions and other offenses. None of them are model corporate citizens.

The sad truth is that the decisions of ethical investors will make little difference in the future of the military contractors. With or without an ESG seal of approval, they are riding high and will continue to prosper as international conflicts intensify. We can only hope that the world calms down, and we can go back to treating weapons producers with the same disdain we direct toward coal and tobacco companies.

The Pentagon Wakes Up to Arms Industry Concentration

Lockheed Martin’s decision to bow to pressure from the Federal Trade Commission and abandon its takeover of Aerojet Rocketdyne is a rarity. Such mergers among weapons producers were long encouraged by the Pentagon and approved by antitrust regulators. Bigger and more prosperous contractors were seen as being in the national interest.

This gave rise to a group of military leviathans. Along with Lockheed Martin, the result of the 1995 combination of Lockheed and Martin Marietta and the later addition of Sikorsky Aircraft, those giants include: Raytheon Technologies, which arose out of the 2020 merger of Raytheon and portions of United Technologies; Northrop Grumman, born out of the 1994 combination of Northrop Aircraft and Grumman Corporation; General Dynamics, formed from the 1950s merger of Electric Boat Company and Canadair; and Boeing, which gobbled up McDonnell Douglas in 1997.

Concentration, however, is no longer seen as a virtue in the arms industry. The Defense Department has just issued a report warning that the sharp reduction in competition among contractors is creating problems for the Pentagon. It points out that the number of aerospace and defense prime contractors is down from 51 in the 1990s to five today, making the military highly dependent on a very small number of producers in all categories of weapons systems.

This reduction in competition, the report argues, creates supply risks, increases costs and diminishes innovation: “Consolidations that reduce required capability and capacity and the depth of competition,” it states, “have serious consequences for national security.”

In place of the old approach of “bigger is better,” the report recommends heightening merger oversight, encouraging new entrants, increasing opportunities for small business, and hardening of supply chain resiliency.

For all its candor, one issue the report does not address is the checkered history of the big contractors in terms of honest dealing. They were all involved in numerous procurement scandals in the 1980s, the 1990s and into the 2000s. These ranged from massive cost overruns to cases of outright bribery.

The misconduct has continued. According to Violation Tracker, which covers cases back to 2000, the big five have paid more than $2 billion in fines and settlements in cases relating to government contracting—mainly violations of the False Claims Act. For example:

In 2006 Boeing paid $615 million to resolve criminal and civil allegations that it improperly used competitors’ information to procure contracts for launch services worth billions of dollars from the Air Force and NASA.

In 2008 General Dynamics agreed to pay $4 million to settle allegations that a subsidiary fraudulently billed the Navy for defective parts.

In 2014 a subsidiary of Lockheed Martin paid $27.5 million to resolve allegations that it overbilled the government for work performed by employees who lacked required job qualifications.

In 2009 Northrop Grumman agreed to pay $325 million to settle allegations that it billed the National Reconnaissance Office for defective microelectronic parts.

In 2008 Raytheon subsidiary Pratt & Whitney, then part of United Technologies, agreed to pay $50 million to resolve allegations it knowingly sold defective turbine blade replacements for jet engines used in military aircraft.

Now that the Pentagon is trying to reduce its dependence on giant contractors, it should also show less tolerance for corruption on the part of suppliers both large and small.

Abandoning Human Rights to Benefit Crooked Corporations

According to the grievance-based worldview of Donald Trump, the United States is constantly being cheated. He purports to be addressing this through his trade policies and his attitudes toward international organizations such as NATO. Yet he seems to be a lot less concerned about another kind of cheating: the ongoing fraud committed against the federal government by military contractors.

This is an old story yet it takes on new relevance amid the current controversies over the murder of U.S.-based journalist Jamal Khashoggi by the Saudi government and ongoing American support for the brutal Saudi military intervention in Yemen. Trump’s main justification for refusing to take stronger action against the kingdom is his claim that it would jeopardize potential U.S. arms sales to the Saudis, the value of which Trump wildly inflates.

Trump usually frames this in terms of jobs, but it is actually more a matter of revenue and profits for major weapons producers such as Lockheed Martin and Raytheon. It comes down to this: Trump is undermining the moral stature of the United States and giving a green light to despots who want to eradicate dissidents, all in the name of pumping up the cash flow of a handful of corporations.

Although he fancies himself a master dealmaker, it is unclear what Trump is receiving in return from these companies. In the past, Trump has made noise about the cost of some Lockheed and Boeing contracts but there was little follow-up. The big weapons producers are not now among the president’s favorite tweet targets.

There is every reason to believe that the big contractors are continuing their long-standing practices of charging excessive amounts for their weapons and then cheating on the terms of the contracts. Sometimes they get caught doing the latter and are made to pay penalties they can easily afford.

To take a recent example: in early November the Justice Department announced that Northrop Grumman had agreed to pay $27.45 million to resolve allegations that it overstated the number of hours its employees had worked on two battlefield communications contracts with the Air Force. This matter, like most of the cases brought against military contractors, was handled primarily under the False Claims Act, which allows for a civil settlement and monetary penalties but no criminal liability.

The Northrop case was unusual in that there was a parallel criminal investigation of one of the contracts, but the Justice Department reached an agreement with the company under which it forfeited an additional $4.2 million and no criminal charges were filed.

This was just the latest in a series of False Claims Act cases in which Northrop has paid out in excess of half a billion dollars in penalties for various contract frauds. It is far from unique in this regard. For example, as shown in Violation Tracker, Boeing has paid out $744 million in penalties in eight False Claims Act cases since 2000 and Lockheed has paid $125 million in 13 cases.

It is bad enough that President Trump is abandoning U.S. support for human rights; it is even worse that he is doing so to benefit a group of corporations that regularly cheat the government he heads.

Corruption and Concentration

The United States has by far the fattest military budget in the world, but soon the biggest company providing much of that weaponry could be European. Britain’s BAE Systems and Airbus parent EADS have announced plans to join forces, creating the world’s largest aerospace and military contracting corporation.

Business analysts are focusing on the challenge such a merger would pose to the companies’ U.S. rivals Boeing and Lockheed Martin, while little mention is being made of the fact that the deal would bring together two of the most ethically challenged large corporations in the world today.

For most of the past decade, BAE has been confronted with allegations that the company engaged in widespread bribery in its dealings with foreign governments. The charges began to receive significant attention in June 2003, when The Guardian reported that the U.S. government had privately accused BAE of offering bribes to officials in the Czech Republic. The Guardian went on to report that BAE was facing bribery allegations in three additional countries: India, South Africa and Qatar. Among the charges was that BAE had paid millions of pounds in secret commissions to obtain a huge deal, backed by the British government, to sell Hawk jets to South Africa. There were subsequent allegations that the company had formed a £20 million slush fund (later said to be £60 million) for paying bribes to officials in Saudi Arabia in the 1980s.

Despite denials by the company, Britain’s Serious Fraud Office (SFO) launched a criminal investigation of the bribery charges, focusing on the allegations regarding Saudi Arabia. BAE and the Saudi embassy reportedly lobbied intensively to have the probe terminated, and in December 2006 their effort paid off. The British government called a halt to the case because of national security concerns. (In April 2008 Britain’s High Court ruled that the termination of the investigation was unlawful, but in July 2008 the House of Lords overruled the court.) The SFO did, however, continue to investigate BAE’s questionable behavior in six other countries. The company was also being investigated by Swiss officials for possible money laundering violations.

Unable to escape these allegations, BAE announced in June 2007 that it would commission its own purportedly independent examination of the issues led by Lord Woolf, former lord chief justice of England and Wales. The Woolf Committee’s 150-page report, released in May 2008, stated that BAE’s top executives “acknowledged that the Company did not in the past pay sufficient attention to ethical standards and avoid activities that had the potential to give rise to reputational damage.” However, the report seems to have bowed to the wishes of the company that the focus be placed on the future rather than the past. The report provided what it called “a route map for the Company to establish a global reputation for ethical business conduct.” Among its 23 recommendations is that BAE “continue to forbid facilitation payments as a matter of global policy.” Given the less than draconian nature of the recommendations, it is no surprise that BAE agreed to adopt all of them.

A new front in BAE’s problems with questionable payments opened in late July 2008, when the Financial Times reported that it had seen documents suggesting that the company had paid at least £20 million to a company linked to a Zimbabwean arms trade close to controversial President Robert Mugabe.

In February 2010 BAE reached settlements with the U.S. Justice Department and the U.K. Serious Fraud Office concerning the longstanding bribery charges. The company agreed to pay $400 million in the U.S. and the equivalent of about $47 million in Britain to resolve the cases.

Confidential U.S. government cables given leaked to the press by Wikileaks in 2011 indicated that BAE had paid more than £70 million in bribes to Saudi officials to support its help win a contract for fighter jets.

EADS has been embroiled in its own corruption controversies. In mid-2006 a scandal emerged regarding EADS co-chief executive Noel Forgeard. French and German market regulators announced that they were looking into the timing of substantial sales of EADS stock by Forgeard and members of his family that occurred just before the company announced delays in the production of the Airbus A380 superjumbo jet. Forgeard initially claiming the timing was coincidental, but within a few weeks he was forced to resign, as was the head of Airbus, Gustav Humbert.

That did not put an end to the insider trading investigation. In December 2006 French police searched the Paris headquarters of EADS and that of its main French shareholder, the Lagardère conglomerate. In April 2008 a formal complaint was filed against EADS as well as more than a dozen current and former executives. The following month preliminary charges were brought against Forgeard and then against former deputy chief executive Jean-Paul Gut. In December 2009, however, French authorities concluded there was insufficient evidence against the executives.

Prior to the insider trading affair, EADS and/or Airbus had been named in numerous scandals around the world involving alleged bribery. A 2003 article in The Economist described a pattern of foreign bribes paid by Airbus throughout its history, noting that the French government tolerated such payments until 2000.

One of the most significant controversies occurred in Canada, where former Prime Minister Brian Mulroney was investigated over charges that he took bribes from German businessman Karlheinz Schreiber to induce Air Canada (then government controlled) to purchase $1.2 billion worth of Airbus planes in 1988. Mulroney denied the allegation vehemently and sued his own government, winning an apology and a cash settlement. The allegations were kept alive when Schreiber brought a civil suit against Mulroney, but Schreiber ended up making contradictory statements about the matter.

In December 2007 the government of India cancelled a $600 million order for military helicopters from Eurocopter after allegations that there had been corruption in the bidding process.

Just last month, it was reported that Britain’s SFO has launched a criminal probe of claims that a unit of EADS bribed officials in Saudi Arabia to win a $3 billion communications contract. The company asked PricewaterhouseCoopers to conduct a parallel investigation.

Given the records of these two corporations, the regulators who will be deciding whether to approve the merger should also consider what conditions could be imposed on the combined company to get it to put an end to its legacy of corruption.

Making Honeywell Feel the Heat

How would you describe the situation of a corporation involved in union-busting, mishandling of radioactive waste, production of nuclear weapons and the effort to lower corporate tax rates while cutting Social Security and Medicare? If you are Barron’s, you’d say the firm is “in its sweetest spot in more than a decade.”

That’s the way the investment weekly describes Honeywell International in a recent article that gushes over the company’s financial results and predicts that its stock is “poised for liftoff.” Honeywell, a $33 billion transnational, is viewed differently in Metropolis, Illinois, where some 230 members of the United Steelworkers union have been locked out of their jobs for more than nine months.

Apologists for the attacks on public employees often try to disavow anti-union motivations by saying they have no problem with collective bargaining in the private sector. Honeywell is a glaring reminder that challenges to worker rights can be found among employers of all types these days.

The dispute in Metropolis—which calls itself the hometown of the fictional character Superman—brings together a variety of current hot-button issues, including unions, nuclear power, environmental protection, healthcare coverage and pensions. Honeywell’s plant is the sole facility in the country that converts uranium ore into the uranium hexafluoride gas used in the production of both nuclear power and nuclear weapons. This is a risky process that involves highly toxic materials.

These dangers were highlighted in December 2003, when an accidental release of toxic gas forced the evacuation of nearby residents and the shutdown of the plant for four months. The U.S. Nuclear Regulatory Commission (NRC) issued two violations relating to the way the company handled the incident.

Given such hazards, the members of Steelworkers Local 7-669 have long focused on safety issues, both for themselves and for the surrounding community. The union has been particularly concerned about the high rate of cancer among the workforce and thus has sought to negotiate good health coverage for active workers and retirees. During contract renegotiations last year, Honeywell sought to eliminate retiree health benefits, reduce pensions for new hires, cap severance pay and contract out maintenance. When the union balked but declined to strike, the company abruptly locked out the workers in June. And in a move made all the more reckless by the dangerous nature of the work, the company brought in poorly trained replacements to keep the plant operating.

In September, a loud explosion was heard at the plant but there were no reports of toxic releases. A Steelworkers report notes that the company was cited by the NRC for improperly coaching replacement working during on-site job evaluations by federal inspectors. Honeywell’s safety image was further tarnished just a few weeks ago, when the U.S. Justice Department and the EPA announced that the company had paid a criminal fine of $11.8 million to resolve a charge of illegally storing hazardous and radioactive materials in Metropolis.

The $11 million is the latest addition to the more than $650 million in fines and damages Honeywell has paid since 1995 in connection with 32 instances of misconduct collected by the Project On Government Oversight in its Federal Contractor Misconduct Database (the company ranks 17^th in amount paid out).

Honeywell’s record of corporate irresponsibility goes back even farther. From the late 1960s through the late 1980s, the old Honeywell (prior to its 1999 takeover by AlliedSignal, which adopted the name) was targeted by antiwar activists because of its production of cluster bombs and land mines that were widely used in Vietnam and later because it was unwilling to take responsibility for clearing munitions that remained after the war was over.

Despite this checkered history, Honeywell has remained a large federal contractor. It is involved, for example, in both the clean-up of the Cold War-era Savannah River nuclear weapons complex in South Carolina and the construction of a new nuclear arms production facility in Kansas City.

And if all the above is not enough controversy, Honeywell CEO David Cote was named by President Obama (before the lockout) to the National Commission on Fiscal Responsibility and Reform, which issued a report in December that, among other things, proposed cuts in corporate tax rates. Cote issued a personal statement complaining that the report did not take a harder line on Medicare and Medicaid, and he recently called for cuts in Social Security. He also just told Bloomberg Television that he would love to see corporate income taxes entirely eliminated.

For many people, the Honeywell name is still associated with thermostats. But today, it is a poster child for much that is wrong with corporate America—mistreatment of workers, environmental recklessness, military profiteering, and unwillingness to pay a fair share of taxes. It should be made to feel more of the heat itself.