You're reading: UkrOboronProm rated low in transparency, anti-corruption effort

Global anti-graft organization Transparency International is not impressed by the hard-won reforms and bold promises at UkrOboronProm, Ukraine’s state defense giant, which has a nasty reputation of corruption and ineffectiveness.

In a recent study of the world’s 137 largest arms manufacturers, the watchdog’s defense and security branch gave the Ukrainian one a grade of E, one step above the lowest grade of F, for its anti-corruption drive and business accountability.

UkrOboronProm got only 30 out of 100 points on the so-called “policy score,” which indicates “the amount of publicly available information on the company’s policies and procedures that aim to reduce the risk of corruption,” according to the study.

The state concern also scored 15 out of 100 points in the “transparency data” category, which measures how well UkrOboronProm provides public data that can help mitigate corruption risk in the sector overall.

Transparency International’s assessment covers September 2019 through May 2020, which corresponds to the tenure of Aivaras Abromavicius as head of UkrOboronProm. President Volodymyr Zelensky appointed him in late August 2019 and dismissed him in October 2020.

The watchdog praised UkrOboronProm’s leadership and organizational control, giving it an A or 88 points out of 100. The report acknowledged that the company’s top manager “makes a clear endorsement of the anti-corruption program, which supports a zero-tolerance stance against all forms of corruption within the organization.”

“However, there is no evidence the company’s policy applies to the staff and leadership of subsidiaries and other controlled entities, nor does it explicitly apply to all of the company’s board members,” the watchdog added “There is also no evidence the company’s policy explicitly prohibits facilitation payments or payments to public officials.”

A C grade was given to UkrOboronProm’s internal controls, stating that “the company commits to investigating incidents and has a specific procedure to deal with whistleblowing cases.”

“However… there is no evidence that investigations are handled by an independent team or report to an independent board member,” Transparency International said.

“The company also makes no commitment in publicly available evidence to providing whistleblowers with updates on the outcome of investigations. There is additionally no evidence that summary information of investigations is reviewed by a central body.”

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The watchdog gave poor marks to UkrOboronProm’s support of employees (29 out of 100), conflict of interest management (25 out of 100), customer engagement (7 out of 100), supply chain management (10 out of 100), addressing risks in joint ventures (5 out of 100) and offset companies (0 out of 100).

Ukraine remains a highly risky environment for the defense industry, Transparency International wrote.

According to the watchdog’s Government Defense Integrity (GDI) index data, arms businesses in Ukraine have “high” risks in finances and procurement, “critical” operational risks, and “moderate” political and personnel problems.

UkrOboronProm, an association of over 130 state-run enterprises, was created in 2010 under President Viktor Yanukovych to centralize control of the country’s multimillion defense production industry.

In the following years, it has seen multiple high-profile corruption scandals and became in many ways a symbol of cronyism and extremely poor effeсtiveness, including in the foreign market.

Despite being the primary state defense procurement program, the conglomerate’s economic condition has deteriorated. According to its leadership, nearly two-thirds of UkrOboronProm’s enterprises are either severely loss-making or completely defunct. Just 28 entities generate 98% of annual revenue.

In 2018, UkrOboronProm reported Hr 45.2 billion ($1.6 billion) in revenue.

An ongoing reform plan, years in the making, envisages transforming UkrOboronProm into six industry-based corporatized branches managed by a state-run holding company, Defense Systems of Ukraine.

Some of UkrOboronProm’s enterprises, like the legendary Kyiv-based aircraft manufacturer Antonov, are expected to be taken away and combined into a separate holding company, the Aerospace Systems of Ukraine.

A list of arms companies ranked E with regard to their anti-corruption commitment

UkrOboronProm is not alone in Transparency International’s doghouse.

The E grade was also given to a range of well-known defense market players including French companies Nexter Group and Dassault Aviation, South Korea’s Daewoo Shipbuilding & Marine Engineering, Japan’s Mitsubishi and Kawasaki, United States’ General Dynamics, and Russia’s Rostec and Russian Helicopters.

Only two companies, Italy-based Leonardo S.p.A. and U.S.-based Raytheon Technologies merited Transparency’s highest estimates of “public commitment to anti-corruption and transparency in the corporate policies and procedures.”

In December, recently-appointed Director-General Yuriy Husyev signed a decree to finally launch UkrOboronProm’s realignment program throughout 2021. If successful, the concern will stop existing in its present form.

On Jan. 29, after months of deliberations and behind-the-scenes struggle, parliament passed in the first reading a bill on the corporatization of UkrOboronProm, which is expected to provide the reform’s legal basis.

Yuriy Husyev: UkrOboronProm will go out of existence in 2021

For many in Ukraine’s expert community, the company’s low grade was no surprise.

“It definitely cannot be called coming out of the blue because of two reasons,” said Hlib Kanievskyi, a chairman with Kyiv-based watchdog StateWatch.

“First, the concern has a negative reputation gained in 2011-2019. Truth be told, the UkrOboronpProm’s top management today acknowledges and understands the systemic issues that jeopardize the concern’s manufacturing and financial performance.”

For instance, the company had just recently published the results of a comprehensive audit into the company’s business activities in the fiscal year 2018, carried out by Baker Tilly Ukraine, which revealed the concern’s failures and abuses.

“UkrOboronProm has never done anything like that,” Kanievskyi added.

The top management clearly supports the corporatization bill that would force the company to observe the business standards of the Organization for Economic Co-operation and Development (OECD), he said.

“(The bill) enjoys personal support from President Volodymyr Zelensky, it was jointly professed by the government, the parliament, the concern, and the community as far back as in summer 2020. But as late as in December, the Ministry for Strategic Industries completed submitting its amendments.

“So the bill has not yet passed parliament.”