OPEN SECRETS: UNACCOUNTABLE

BAE Systems – (Profit) before anything else

By Open Secrets 1 July 2020

This is an instalment in Open Secrets’ series detailing BAE Systems’ network of middlemen and agents who were paid generously in return for their political connections and influence during South Africa’s 1999 Arms Deal. This week, we turn our focus from the individual middlemen who profited, to the UK mega arms corporation pulling the strings at the centre of the network of covert partners, offshore companies and secretive, but highly lucrative, money transfers. BAE used its network first, to ensure it won the most lucrative part of the Arms Deal, and then later to avoid accountability for the alleged bribe payments upon which its selection relied. With its modus operandi laid bare, and the evidence overwhelming, there is no reason for BAE to remain unaccountable.

BAE’s Business background

BAE Systems, previously known as British Aerospace, is a British behemoth in the notoriously corrupt global arms trade. The UK-based company has and continues to supply arms to war-torn regions across the globe, seemingly with little regard for the lived realities of the civilians who suffer as BAE’s jets drop bombs on them. 

The most recent example of BAE’s willingness to put profit before their human rights obligations is their continued supply of weapons to Saudi Arabia despite the Saudis’ ongoing human rights abuses in Yemen. This was affirmed by a June 2019 UK court ruling, which declared UK arms sales to Saudi Arabia unlawful. Not even this has stopped BAE from continuing its supply. The company has continued to make its regular flights from England to Saudi Arabia with the cargo and the expertise needed to continue the indiscriminate bombing of Yemeni civilians.

BAE has a long and lucrative history with Saudi Arabia, assisted along the way by the British political establishment. In 1985, BAE entered into a deal to supply Saudi Arabia with fighter jets and other aircraft. The deal, known as the Al-Yamamah deal, was sanctioned by Margaret Thatcher and would come to be known as the most corrupt transaction in commercial history. At the time, the deal was worth about £43-billion. It later emerged, during an investigation by the UK Serious Fraud Office (SFO), that BAE had paid more than £6-billion in bribes to UK and Saudi politicians, and middlemen in order to secure the deal.

However, as the SFO investigation started gaining traction, the UK government, pressured by threats of “repercussions” from the Saudis, made the call to halt the SFO’s investigation, claiming that prosecution would be unlikely. It later emerged that this decision was made after direct intervention by then Prime Minister Tony Blair, who insisted that the investigation into BAE’s conduct in relation to the Saudi Kingdom be stopped.

Despite two decades of denying any wrongdoing in their global operations, including in Saudi Arabia, BAE did acknowledge a “serious accounting offence” regarding their activities in Tanzania. It settled that case with the SFO for a mere £30-million, a fraction of what it made from the deal. In a separate settlement with the US government, BAE paid $400-million for violations of laws that bar the use of bribe payments to secure deals in Saudi Arabia, the Czech Republic, Hungary and other countries.

This was a mere slap on the wrist. Arguably, this failure to pursue real accountability cemented a culture of impunity and allowed BAE to continue to operate its network around the globe and eventually expand its business to South Africa.

BAE Systems secures selection in South Africa

On 3 December 1999, when the final agreements related to South Africa’s multi-billion-rand Strategic Defence Package were signed, BAE Systems had secured itself the largest and most lucrative of all the contracts. It was awarded the contract to supply the South African Air Force with 24 Hawk trainer aircraft, as well as a second contract – along with, Swedish Defence company, SAAB – to supply 26 Gripen fighter jets. Together, these contracts were worth R15.77-billion (valued at about R45-billion today) – more than half the total cost of the arms deal at the time.

However, as set out below, the process to ensure BAE’s selection as South Africa’s preferred supplier of these aircraft was long and riddled with procedural inconsistencies, and irregularities.

BAE, with the help of the UK government, had in fact been lobbying key South African figures from as early as 1993. It is reported that the former UK Prime Minister John Major met with President Nelson Mandela in September 1994, armed with a letter lobbying on behalf of the UK arms industry which, in the wake of apartheid, had identified South Africa as a potential new arms purchaser. This was three years before then Deputy President and head of the Cabinet sub-committee on acquisitions, Thabo Mbeki, formally announced tender invitations for what would be the most expensive post-apartheid government acquisition.

With the support of the British government, through the Defence Export Service Organisation (DESO), BAE, along with other British suppliers, was able to get its products and proposals in front of the Department of Defence before there was even a deal to speak of. By the time the arms deal was announced, a network of questionable relationships had been formed.

What South Africa needed and what it ended up with

By 1994, the South African Air Force (SAAF) was reconsidering its system which required three different types of aircraft at three different skill levels. It was first decided that only the mid-tier aircrafts needed to be replaced as the aircraft at the other tiers were still fully operational with a considerable lifespan remaining; it then decided to transition to a two-tier system. 

Under the two-tier system, pilots would first train on Pilatus trainers and then move onto a fighter jet that could work as both a jet fighter and as a trainer. Under the two-tier system, BAE would not have had a chance – they were offering trainer and fighter jets separately, rather than a multi-role trainer/fighter.

The SAAF invited the submission of tenders from international suppliers. By March 1997, 23 bids had been received and narrowed down to four preferred suppliers. Notably, BAE who had submitted tenders for both its Hawk and Gripen, did not make the shortlist. The Hawk was rejected because it did not meet the operational requirements and the Gripen was rejected because it was too expensive.

BAE did not take this failure lying down. Insistent on expanding its market, it embarked on an intensive lobbying process. Soon thereafter, then Minister of Defence Joe Modise intervened to change SAAF’s system back to a three-tier system; thus creating a space in which BAE’s Hawk and Gripen could be reconsidered, and ultimately selected.

The final selection of BAE and SAAB’s Gripen eventually came down to a technicality. The bids were evaluated on three criteria: technical, financing and offsets. However, mysteriously, neither of the other suppliers under consideration submitted the necessary financing information. 

Why would two bidders at the final stage of a multi-billion-rand acquisition process fail to submit documents needed to possibly secure a lucrative deal? Despite claims by South African officials that repeated requests were made to these arms companies to submit their information, representatives of the losing bidders have alleged that no requests were made for additional information.

As was the case with the Gripen, BAE’s Hawk bid was evaluated on three criteria. However, the Hawk faced even bigger obstacles to selection as it was both technically less impressive than the other options as well as more expensive. BAE’s Hawk ultimately only won the contract after the direct intervention of Modise. In an April 1998 meeting of the Arms Acquisition Council, Modise called for a “visionary approach” to be adopted and that cost as a criterion in the evaluation of the bids be removed. Or, in other words, one of South Africa’s most expensive post-apartheid contracts would be decided with cost excluded. This was good news for BAE whose offer was twice as expensive as its nearest competitor.

Moreover, the offsets offered by BAE were given a huge score that dwarfed its competitors. Offsets were one of the major incentives offered to ensure the public’s approval of the vast amount of money that the Arms Deal would cost South Africa. The offsets were developmental kickbacks meant to promote economic growth and industrial development within South Africa, though few ever materialised.

The World Trade Organisation (WTO) generally prohibits using “offsets” as a selection criterion within procurement processes as they have been argued to constitute “legal bribery”. Remarkably though, the arms industry, an industry which is said to contribute 40% of all corrupt transactions globally, is exempt from this rule, and has come to rely on offset programmes to secure contracts.

In this case, BAE submitted an offset proposal that was roughly 10 times larger than that of any of their competitors. However, it would later be confirmed that the offset benefits offered by BAE under the Hawk agreement were grossly miscalculated. Their promise of R10-billion actually only equated to R1.5-billion in offsets. The Hawk was thus selected on the basis of egregiously wrong information. While this information would usually be enough to cancel or reevaluate the contracts, no effort was made by the acquisition committee to do either.

The BAE network in South Africa

As we saw in Unaccountable 00012 and 00013, BAE relied on a number of overt and covert agents in their vast network to advance their business interests across the world. 

This network was blown wide open in November 2008 when the Scorpions raided the properties of BAE Systems South Africa and their key agents, the now-just deceased John Bredenkamp and Fana Hlongwane. In order to secure the search warrants necessary for the raids to take place, the Scorpions relied heavily on an affidavit from the UK’s SFO. 

The SFO affidavit outlined how BAE had allegedly run a system of agents in South Africa in an effort to secure contracts in the arms deal. This system operated with the explicit intention to facilitate payment of massive “commissions” – totalling £115-million – by BAE to various agents. 

This network not only ensured that BAE could continue to maximise its profits, but also that it could avoid any scrutiny from investigative authorities and that payments could be made to those in positions of power without being traced.

Red Diamond

According to the SFO affidavit, in the 1990s, BAE was looking for a system to conceal payments to its system of agents following concern that payments they had been making to Chilean dictator Agusto Pinochet might be discovered. By 1998, Red Diamond Trading Limited was established in the notorious tax haven of the British Virgin Islands for this purpose. The company was set up specifically to make payments to covert agents as records show that BAE’s overt agents continued to be paid through normal BAE channels. The SFO rejected the defence presented by BAE executive Mike Turner that these payments were made solely to avoid scrutiny from media and anti-arms campaigners. Instead, the SFO concluded that Red Diamond was primarily used with the explicit intent to ensure that corrupt payments could be made without raising any alarms within law enforcement agencies.

While we’ve shown in previous instalments that payments were made to Bredenkamp and Hlongwane through Red Diamond, it is alleged that many others were kept on BAE’s bankroll. 

Joe Modise

Joe Modise was the defence minister at the time of the arms deal. As noted above, before his death in 2001, Modise was accused of altering procurement processes during the arms deal, specifically to ensure BAE’s selection. His interventions in this regard are discussed above and included demanding that the acquisition process ignore the issues of cost. He was also accused of failing to declare clear conflicts of interest; companies in which he held shares stood to profit approximately R20-million from contracts related to the fulfilment of BAE’s offset obligations. While there was considerable suspicion related to his role in the BAE network, investigation into the former defence minister ceased after his death.

Stella Sigcau

The late Stella Sigcau was the Minister of Public Enterprise at the time of the deal. Sigcau was one of five members of the Cabinet sub-committee in charge of the acquisition process, along with Thabo Mbeki, Joe Modise, Trevor Manuel and Alec Erwin. 

In 2013, evidence emerged that Sigcau was another player that BAE provided benefits to in order to advance its arms deal bid. Fax messages dated September 1998 uncovered during the SFO investigation, indicate that BAE’s representative in South Africa, Alan McDonald, had helped to arrange for Sigcau’s daughter to be given a job in the UK, as well as further assistance for Sigcau’s grandchildren. 

Was this assistance related to the deal? In the fax, McDonald asks for assistance in ensuring that Sigcau is given the support that she requested for a personal family matter. Conveniently, McDonald prefaces his request by stating that:

“The fact we have got Hawk on to the final list is very much due to our friends in the country rather than the quality of our ITP [Invitation To Prequalify] response. One friend who has, and remains, absolutely critical to our ultimate success for both Hawk and Gripen is Minister Stella Sigcau.”

Not only does McDonald acknowledge BAE’s reliance on local agents and their favours to ensure selection, but he also seemingly acknowledges the poor quality of their bid.

Additional correspondence between Portia Ndzamela, Sigcau’s daughter, and a BAE representative confirms that efforts were made to secure a job as well as a residence for Ndzamela and her children in London. In that correspondence, Ndzamela not only thanks the BAE representative for the support services during her trip to London which she describes as “outstanding and of the highest order”, but also says that she looks forward to making the move to London and “developing a friendly and professional relationship that will be mutually beneficial”.

It is clear from these fax messages that BAE understood that by providing Sigcau with the requested support for her daughter, that their bid would be favourably considered or even prioritised.

BAE Responds

Last week, a BAE Systems representative, having read Unaccountable 00012 and 00013 lamented to Daily Maverick that it had not been asked to comment. BAE offered a statement in response to Open Secrets’ calls for arms deal era accountability – and pre-emptively to this article – which read:

“Our settlements with the [UK Serious Fraud Office] SFO and [US Department of Justice] DOJ a decade ago followed long investigations by those authorities relating to a number of countries, including South Africa. Neither settlement involved charges of bribery or corruption relating to South Africa or any other country.”

BAE’s response conveniently ignores a third settlement – a 2011 settlement with the US Department of State. In that settlement, BAE admitted to using their Red Diamond system to pay agents in South Africa. Yet in the earlier DOJ settlement, they had admitted that the payments through Red Diamond were made with the knowledge that they “would be used to ensure BAE was favoured in foreign government decisions regarding the sale of defence articles”. Read together, the two settlements provide the irresistible inference that the payments made through Red Diamond to agents in South Africa were made to influence the South African government. 

BAE Continuities

Like many of those implicated in arms deal era corruption, BAE has managed to escape accountability for its role in the erosion of South Africa’s democratic institutions and citizens’ trust. While the 1999 arms deal was by no means the first corruption scandal to hit South African taxpayers, it was the first in post-apartheid South Africa where institutions sought to build an accountable state for the first time. 

Instead, the deal and those involved in it have undermined South Africa’s democratic project and entrenched a culture of impunity. This culture can only be challenged by holding to account those who took advantage of a country in transition in order to further its own profits. BAE should be one of the first mega-corporations to account for its role in this story. Its deep pockets also mean it is well placed to pay back the money. DM

Open Secrets is a non-profit organisation which exposes and builds accountability for private-sector economic crimes through investigative research, advocacy and the law. Tip-offs for Open Secrets may be submitted here.

Previous articles in the Unaccountable series are: 

 

Dame Margaret Hodge MP – a very British apartheid profiteer

Liberty – Profit over Pensioners

Dube Tshidi & The FSCA: Captured Regulator?

Rheinmetall Denel Munition: Murder and mayhem in Yemen

National Conventional Arms Control Committee – handmaiden to human rights abuse?

Nedbank and the Bank of Baroda — Banking on State Capture

HSBC – The World’s Oldest Cartel

Estina’s Banks

McKinsey — Profit over Principle

Jacob Zuma – Comrade in Arms

Thales — how to buy a country

John Bredenkamp – Agent of BAE Systems

Fana Hlongwane – Agent of BAE Systems

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