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Military-Owned Businesses Pose Unique Corruption Risks (incl: Indonesia/Freeport Mining)

January 27, 2012

Military-Owned Businesses Pose Unique Corruption Risks (incl: Indonesia/Freeport Mining)

excerpts: One case study examined in the report showed the challenges
countries face when trying to reform firms owned or controlled by
militaries. In Indonesia, Freeport McMoRan Copper & Gold Inc.
disclosed that it paid millions to the Indonesian Armed Forces for
security services … Since 2003, the company has avoided making
payments directly to individuals in the military, instead making them
to headquarters. However, the story has still remained in the news:
The United Steelworkers sent a letter in November 2011 to the U.S.
Justice Department calling for an investigation into violations of
U.S. foreign bribery law over the payments.
… At the time, the company said it reports all the financial
contributions it makes to governments … Indonesia, meanwhile, passed
several laws in 2004 officially requiring the government to shut down
or take over businesses owned by the military by October 2009, but the
report said that effort has only been “partially successful.”

The Wall Street Journal
January 26, 2012

Military-Owned Businesses Pose Unique Corruption Risks

By Samuel Rubenfeld

photo: Indonesian Defense Minister Purnomo Yusgiantoro holds a PT
Pindad PM2 assault rifle during an exhibition at the military
headquarters in Jakarta on Jan. 18, 2012. Bay Ismoyo/Agence
France-Presse/Getty Images

Businesses owned by militaries around the world pose unique corruption
risks to the sectors in which they operate, a new report found.

The report, released Thursday by Transparency International’s U.K.
Defence and Security Programme, looks at how military-owned businesses
are structured, what the inherent corruption risks are for these
firms, and why and how the countries have made reforms to their
military-owned companies.

“Once the military begins to engage in economic activities, it is
often difficult to end such practices. In most situations, corruption
becomes rampant and a major problem which (sic) harms the state and
the national economy as well,” the report said.

Introducing a profit motive into the military increases the chance for
distraction, the report said. Looking at case studies in China,
Indonesia, Turkey and Pakistan, the report found that distraction
often leads to outright graft, and in the more extreme cases that
manifests itself in the form of embezzlement of state funds, tax fraud
and even brutal coercive practices on workers.

One case study examined in the report showed the challenges countries
face when trying to reform firms owned or controlled by militaries. In
Indonesia, Freeport McMoRan Copper & Gold Inc. disclosed that it paid
millions to the Indonesian Armed Forces for security services.

Since 2003, the company has avoided making payments directly to
individuals in the military, instead making them to headquarters.
However, the story has still remained in the news: The United
Steelworkers sent a letter in November 2011 to the U.S. Justice
Department calling for an investigation into violations of U.S.
foreign bribery law over the payments.

At the time, the company said it reports all the financial
contributions it makes to governments.

Indonesia, meanwhile, passed several laws in 2004 officially requiring
the government to shut down or take over businesses owned by the
military by October 2009, but the report said that effort has only
been “partially successful.”

The reasons for a lack of success? The laws were unclear and didn’t
explicitly require the military to surrender its businesses. Moreover,
the military isn’t exactly volunteering to hand over the companies,
and the oversight team supposedly in charge of the effort didn’t have
the power to force it to happen.

“Despite the good intentions of the government’s reform agenda, it has
failed to see it through. Nonetheless, they have managed to eliminate
a vast proportion of the military’s commercial enterprises,” the
report said of Indonesia’s efforts.

Read the report below:

TI UKDSPMilitaryownedbusinesses

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