Space Startups take note: Fraud, Bribery & Corruption charges increase chances of UKSA & ESA financial support

15th Oct 2020
UK Space Agency funding

Financial corruption and other criminal activities have plagued the space industry for decades, with allegations of bribery & fraud frequently appearing on the rap sheets of some of the industry giants. The question now is whether the European Space Agency and its smaller partner, the UK Space Agency are the last bastions of hope in cleaning up the sector – at least in Europe – or are they part of the problem?

The European Space Agency Geographical Return program is created to ensure each contributing country gets equal benefit from their annual contributions to the ESA. The UK’s contribution to ESA for the next five years will be £1.5bn or roughly £300m per year.

A look through the 2015-2019 ESA financials, particularly the geographical return figures reveals some very interesting differences between each of the participating countries.

One of the main revelations is the amount of ESA funding that is doled out to Airbus (an entity largely owned by German, French & Spanish governments). If you look at Germany for example, 48% of the funds from ESA during 2015-2019 went to Airbus Defence & Space. To put this into context, 2% of the available funds were awarded to SMEs.

A similar ratio applies in the UK, with 45% of ESA geographical returns going directly to Airbus Defence & Space, and 11% going to SMEs.

France has an even wider disparity in the amount of funding going to SMEs. With 70% of ESA funds going to Airbus, Ariane Group (an Airbus subsidiary with operations in Germany & France) & Thales (26% owned by French Government) and only 1% going to SMEs.

So, let us look at the UK individually. The government pledged £1.5bn contribution to ESA over the next 5 years. With a geographical return coefficient of 0.94, that means £1.41bn of that will go back to the UK space industry. So £634.5m (45%) of that total would go directly to Airbus Defence & Space. That’s £126.9m per year.  £155.1m would go to SMEs over the total 5 years. During 2015-2019, 811 new UK companies were registered with ESA. 316 of those are categorised as SMEs.

What can we learn from this?

The crucial take away is that the European Space Agency is mostly funding the giant defence contractors owned by the Governments of France, Spain & Germany and not lending its financial clout to the development of the new space sector. The innovations within the space sector come from mostly SMEs. The large companies like Airbus, Boeing, Lockheed Martin have been pretty stagnant for decades with almost no sign of innovation (in space) coming from them. The innovations we have seen have come from new start ups, which are in the most part SMEs.

Let’s ask ourselves the question “What significant development have we seen from Airbus in the advancement of the space industry?”. It’s not even a difficult question to answer. If Airbus had made any huge advancement in space technology we would all have heard about it. Yes, they put a lander on a comet. It’s hardly the sort of innovation that we can categorise as “New Space”.

We can see who is making the biggest strides in the advancement of space right across Europe – with the same picture being reflected in the USA where “private space” is making the biggest leaps forward. And yet, the long-established giants receive the bulk of lucrative government orders, despite being embroiled in decades of nefarious activities & criminality and absolutely lacking in any sort of ground-breaking innovation. Yet SpaceX show them that innovation and progress are possible – and more importantly essential for the advancement of mankind.

If we look at the UK’s new space industry. The country’s primary goals right now include the creation of launch sites, the construction of launch vehicles and innovation within satellite technology. None of this is reflected in the ESA distribution of funds. ESA’s spending in the UK is completely out of line with the UK’s own ambitions. They gave the bulk of their spend in the UK to established behemoths, with a small portion going to smaller, enterprising, innovative companies.

Brexiteers may be surprised to hear that the UK is still funding Europe

Those who voted for the UK to leave Europe so that the country could carve its own path, independent of the ties of the European Union, would probably view this scenario as unfinished business. The ones who pushed the Brexit agenda would likely baulk at the fact that the country is still so strongly tied to Europe through the European Space Agency, with a significant financial commitment and very little obvious financial return. But more worrying is who they are handing the majority of that funding to. In the most part it is arriving firmly into government interests held by the French, German & Spanish states.

Largest recipient of ESA Geographical Return in corruption scandal

As we have identified, Airbus in most of the European countries is the largest recipient of funds from the European Space Agency pot, despite being embroiled in fraud, bribery and corruption scandals. This year the company came to an agreement with US, French & UK governments to pay significant fines – somewhere in the region of €3.6 billion for some very serious breaches of law.

https://www.theguardian.com/business/2020/jan/31/airbus-to-pay-record-3bn-in-fines-for-endemic-corruption

https://www.bbc.co.uk/news/business-51277946

We highlighted in a previous article that Lockheed Martin, whilst being another giant aerospace company with a long history of legal violations are frequently in receipt of UK government contracts and were the largest recipient of grants from the UK Space Agency for the creating of a launch facility.

There is a definite pattern forming across the UK, EU & USA that statistically if you have been subject to charges of fraud, bribery & corruption, you are most likely to be given easy access to government contracts, grants & subsidies. What is becoming more apparent now, is that the same applies to grants or orders from UKSA or ESA. The largest recipients of funds from those two organisations are the companies with the biggest fines for fraud, bribery & corrupt practices. This is a very worrying trend that may be starting to unravel. But only if the appropriate authorities decide to take a closer look – which in the case of Airbus the UK, France & USA state authorities have done & acted accordingly.

There is absolutely no suggestion that criminality is a qualifying factor. That would just be ridiculous. However, there will (or should be) a robust due diligence process to ensure recipients of government funding are fit and proper and reputable…

Any ordinary person would look at a company that has systematically conducted itself in a manner that has resulted in huge fines and see that the bribery and fraud has become normal practice in order to secure government contracts. That same ordinary person would then look at the huge amounts handed out from the European Space Agency and instantly “assume” that those involed in bribery & fraud had not been allowed anywhere near this process. Wouldn’t they?

Systematic fraud in the aerospace and defence industry

The questionable practices that we have referred to in this article are not limited to the companies we have mentioned above. In fact, those practices have been rife throughout the industry for decades. See below:

CompanyViolationsFines (since 2000)
Lockheed Martin89$767m
Boeing98$1.3bn
Airbus5$3.6bn+
Northrop Grumman73$775m

Boeing:

Boeing Launch Services were suspended from receiving government contracts pending a criminal investigation into the company’s illegal possession of a competitor’s proprietary documents during a competition for a US Air Force launch vehicle in 2003. Combined with the illegal hiring of government officials, the company agreed to pay a fine of $615m.

Link: https://www.contractormisconduct.org/misconduct/32/boeing-launch-services-suspension

Lockheed Martin:

The violations appearing on Lockheed Martin’s rap sheet range from racial harassment to bribery and corruption. As recently as five years ago the company were fined for using federal funds to lobby government in an attempt to secure US government contracts. However, some of the company’s more serious misdemeanours include a charge of government contract fraud dated back to 2008 which culminated in a fine of $10.5m. More recent claims (2019) have suggested the company were in receipt of kickbacks adding up to millions of dollars.

Airbus:

The largest, most recent violation reported was this year, when it was revealed Airbus agreed to pay just under $4bn in fines to UK, France & USA on fraud, bribery & corruption charges.

BBC reporting of Airbus corruption
The BBC reported on the Airbus corruption settlement back in January 2020.
Financial Times report on Airbus bribery scheme.
The Financial Times report on bribery within Airbus operations that lead to $3.6bn fines.
The Guardian report that Airbus admit to bribing officials.
In the Guardian report, Airbus admit to bribing officials to land high-value contracts.

What makes this all quite remarkable is that Airbus is partly owned by the German, Spanish & French states, who between them own just over 25% of the shares.

SOGEPA, a French Government owned entity own 11% of Airbus shares, SEPI, a Spanish Government operated entity holds 4%, GZVB, A German state owned entity holds 11% of the shares.

Airbus shares held by German, French & Spanish governments.

Let’s talk about subsidies

The aerospace industry is heavily reliant upon governments as their main customers. Governments provide them with a number of revenue streams. Firstly, as customers, securing the bulk of their output, but beyond this there are also grants and other subsidies available – often in the shape of tax credits for example. We can see below $159m in subsidies given to Airbus from the US Government. Subsidies are often handed out to companies if they are creating jobs, which in the case of Airbus there were potential subsidies of $158m announced in 2012 when it was proposed they would build an assembly plant in Alabama. This, however, coincided with a ban on all subsidies to Airbus from the EU.

Boeing has often been critical of the funding that Airbus receives from European governments as it puts them at an unfair competitive advantage, creating a very uneven playing field. To a certain degree we find it difficult to disagree with Boeing. But at the same time…. when Boeing turns up to be the “good guys” we find ourselves down a rabbit hole that opens up far more questions than it provides answers.

Northrop Grumman:

This company are lesser known amongst the general public but have been a serious player in the global space industry for decades. They are one of the US Government’s largest suppliers of defence and space services and hardware. A cursory glance at their rap sheet reveals at least one instance of “procurement fraud” as well as a $325m fine from 2009 categorised as “Government Contract Fraud” in relation to satellite equipment. And yet, as can be seen by the table below they are still frequently in receipt of around $10bn per year in US government contracts.

https://www.contractormisconduct.org/misconduct/1115/nro-satellite-false-claims

Northrop Grumman government contracts

Summary

Overall, we expect the entire space industry to draw its attention towards the space/government relationship arrangement and contrast & compare it to how the private space sector operates…. then maybe more people will call them out and potentially group together to ensure progress isn’t hindered by an age old, established culture of cash and corruption… we can only dream.

Other interesting reads:

https://neconnected.co.uk/space-industry-when-conflicts-of-interest-reach-a-cosmic-scale/

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