For over three years, the Independent Defense Anti-Corruption Committee (NAKO) has been effectively monitoring the situation in the Armed Forces and the defense industry. The objective of its activity is to identify and eliminate corruption risks. Particular attention was paid to Ukroboronprom State Concern.
NAKO Secretary General Olena Trehub told ArmyInform what is going on now in the key company of the national defense industry in an exclusive interview.
– Ms. Olena, the current information space is flooded with reports of an international audit at Ukroboronprom, but very few people know that NAKO has been fighting for it for several years…
– Yes, we started lobbying for an audit in the concern more than two years ago. We set this task as part of International Transparency almost as soon as Ukroboronprom got into our field of view. Because it turned out that there has never been an international independent audit here. Otherwise, it was impossible to change this corrupt “monster” with a toxic reputation. The audit was intended to show how well the financial statements were kept in the concern, as well as how the accounting records were arranged as a whole. However, despite the absolute logic behind this idea, the audit was consistently hampered for two years by the leadership of the state. The kept promising NAKO that the audit was about to begin. However, nothing was done. We corresponded with President Petro Poroshenko, talked with the Chairman of the Supervisory Board of Ukroboronprom Mykhailo Zhurovskyi, with the General Director Pavlo Bukin, and before that – Roman Romanov. Everyone promised and did nothing. And after the change of power, the process started very quickly.
– By this time, obviously, there has been some preparatory work done, hasn’t it?
– Yes, our experts, together with the US consultants, representatives of the tender committee of the concern, quickly completed the Terms of Reference (ToR) in the summer of 2018. We, as external experts, helped to rewrite everything. Allegedly, Ukroboronprom could not have done it by itself…
In addition to the reluctance of the authorities, we unexpectedly encountered another obstacle: international companies did not want to participate in the tender for the Ukroboronprom’s audit. We saw some risks. First of all, will the state pay them for their work? In short, distrust of Ukraine as a state was the major reason. We were trying to assure them that International Transparency would always be around, and that NAKO’s parent company Transparency International Defense and Security operates in London … We also guaranteed access to a public platform, our involvement as a monitoring organization, ultimately, transparency and public support of the US Embassy, which also helped. And it finally worked! Three companies agreed. This is how we got the minimum allowable number of companies for the bid. After the presidential election, they announced open bidding. The Big Four company Baker Tilly Ukraine won. On October 1, the new CEO of Ukroboronprom Aivaras Abromavychus signed a contract with it.
– How fast do you think the new team launched the process? Does NAKO being the chief public controller have any reservations?
– They reacted extremely quickly. Before bidding, a number of technical issues had to have been solved, primarily those related to the audit procurement procedure at ProZorro and amendments to the ToR.
To demonstrate the speed, I will give you an example. NAKO, as a mediator, asked the former management of the concern to provide information for international auditors – potential bidders – on the number of concern companies, their assets, turnover, and net income. That is basic financial information. The auditors wanted to see the scope of work to match it against the proposed costs and finally decide whether or not to offer their bid. NAKO wrote a letter requesting that. However, despite the fact that Mr. Zhurovskyi, then chairman of the Supervisory Board, had issued a positive resolution and despite the promises given by Mr. Bukin, director of Ukroboronprom, we had not received anything. When Aivaras Abromavichus became chairman of the Supervisory Board, we filed the request again and received the necessary information the following day by e-mail. The difference is quite noticeable: one day vs. one year…
– At one time, NAKO put a lot of effort into forming the Supervisory Board of the concern. What is the significance of this collegiate institution?
– For more than 2 years, we were insisting that the Board should be created and working. It’s work was intermittently launched and suspended. It was kept in manual mode. Therefore, NAKO insisted on its functionality. This is important because international auditing is impossible without it. I will dwell on this later.
Today, as you know, the President of Ukraine promptly resumed the work capacity of the Board, appointing new members (Andrii Yermak, Ihor Smilianskyi and Yurii Vitrenko) instead of those who had left. One of the Board members is Anthony Tether, who served as Director of the Defense Advanced Research Projects Agency (DARPA) . He represents the Prime Minister’s quota in the Supervisory Board.
– I wonder, are these positions paid or do people work on pro bono basis? And what is the world experience in this matter?
– This is also important. Members of the board are not currently receiving any compensation. And that’s wrong. NAKO insists on changing this situation. In the West, this is absolutely unacceptable. The members of the Supervisory Board have to really work receiving compensation. If the work is done pro bono, the board will be artificial, inferior. Before, it used to be established so that organizations like ours could say: “OK, that’s something at least.” Now both the leadership of the state and Ukroboronprom has the will to bring the functionality of the Supervisory Board to the established international standard. To this end, legislation should be amended to give it more authority, make it paid, and introduce independent members, selected independently, based on meritocratic principles. According to the recommendations of the Organization for Economic Co-operation and Development (OECD), as well as our recommendations, there should be more independent members than those designated by governmental institutions. By the way, the expansion of the Supervisory Board of Ukroboronprom to 7 persons, with 4 independent members, is currently being discussed.
– Will NAKO representatives be included in this collegiate body?
– No. We participate in board meetings as an independent observer. In addition, NAKO has been invited to the Audit Committee, which is being established under the Supervisory Board. That is why, when talking about auditing, I usually tell about this board in detail. Auditing (based on OECD corporate governance standards) is not possible without an audit committee. For its part, the audit committee should be established only at the level of the Supervisory Board. There is a board, a committee, standards compliance, an international audit. And vice versa … The committee will monitor the progress of the audit, the implementation of its recommendations, as the estimated duration of the audit is 6 to 8 months.
– Now, Ukroboronprom is actively updating the team…
– Yes, not only the management of the concern, but also that of the enterprises. In particular, competitions were announced for the positions of directors of Zhytomyr Armored Plant and Zoria – Mashproekt. NAKO and other anti-corruption organizations have been invited to participate in the nomination committee to interview candidates for these vacancies. We will help to check their E-declarations, involvement in corruption cases.
– The international audit of Ukroboronprom has begun. What benefits will it bring to the enterprise, the Armed Forces, the state as a whole?
– Ukroboronprom has two goals. The first is to provide for the Armed Forces, and the second is to increase arms exports. To achieve them, it is necessary to become a successful business. And this applies not only to the concern, but also the economy of the country. If most of the enterprises under the umbrella of Ukroboronprom are successful, they will be able to become the driving force of our economy, Ukrainian innovation. It is a very promising sector.
To make an economic breakthrough, we need foreign investments, joint projects and companies. Unfortunately, there is no money inside the country. And here the value of international audit is really super important. If, for example, it was conducted by a state audit service, it would not be trusted abroad. Because big international companies have long-established rules of operation. If Ukroboronprom has never undergone an independent audit, this means only one thing: none of the investors will cooperate with it. Lack of transparency is a huge weakness. But if the concern manages to conduct an international audit, it will be treated as a worthy partner in the world.
– Some people warn against the harmfulness of excessive openness in the defense industry. Won’t it lead to the leakage of classified information?
– This issue has been discussed for at least a year. It should be understood that the auditor requires only the financial information required for the audit. Any technical data is beyond its competence. Even when it comes to calculations related to some classified things, a request will be made with appropriate explanations. That is, everything will be controlled. A special form of contract will be signed with the auditors. Some of the auditors – citizens of Ukraine – will be granted access to state secrets.
– In the light of corruption scandals around the concern, the society wants to know whether it will finally be revealed who was stealing in the defense industry and how much they stole. Will we find the answer?
– Yes, might I add, not only ordinary citizens are expecting that. In particular, ex-President Petro Poroshenko, when asked at a television program before the election about the beginning of the international audit begin and his attitude to Hladkovskyi’s activities, gave an unusual answer. He said not to make snap judgments about his assessment, and let the audit at Ukroboronprom end first, and then make conclusions on whether Hladkovskyi was stealing or not. In fact, it is populism and manipulation, because international financial audit’s goal is not to detect abuse. At the same time, there is another form – forensics (investigative audit), during which abuse can be detected. And we are quite pleased that the new management of Ukroboronprom has decided to carry out two audits: international and forensic. In particular, ToR has been developed for the latter. In this process, we will provide guidance on where and how to conduct financial investigations.
In this way, a forensic audit will be an adequate response to a public request. And in the future, the enterprises where it will take place will enjoy much greater trust and attractiveness when conducting corporatization and attracting foreign investments. And now we understand why: the double effect of financial and investigative audits will as much as possible clean the likely Augean stables.
– Will the NAKO’s tasks change in the context of defense reforms?
– Yes. Before, we used to monitor various areas of the defense sector and provided mid-level recommendations for the purpose of addressing corruption risks. We conducted advocacy campaigns. That was actually it. Now the efforts of the authorities have changed dramatically. We can see a specific request from Ukroboronprom and from the Ministry of Defense, the Verkhovna Rada Committee on National Security, Defense and Intelligence to implement the specific reform steps and recommendations we have previously provided. NAKO is expected to offer consistent algorithms of action, expertise, procedures, legislation … Together with other anti-corruption organizations, we are facing the challenge of refocusing and responding to the requests in the short window of opportunity.
– Why do you think that these changes will not last long?
– Not quite. I am sure that after 6 months, the pace of reform will slow down and, unless we implement a number of institutional things as soon as possible, there will be no positive breakthrough. In particular, it is about amending the laws “On State Secrets”, “On State Defense Order”. Two types of audits are still needed, reform of special exporters at Ukroboronprom, implementation of asset distribution (triage) policy and launch of corporatization. Of course, a number of companies will never become joint-stock (in particular those of strategic importance to the state), but there are others that will be more effective in distributing shares between public and private owners. It is well known that many companies deliberately brought them into bankruptcy and then sold them. Others remained in state ownership despite being of dubious value for national security.
At present, there are attempts to implement reforms that we will not stand aside. Of course, we remain independent, but we are also trying to engage constructively in the process. This is a unique time to implement solutions that will have real consequences for the country.
– Thank you for your time.