OPEN SECRETS UNACCOUNTABLE #15

Arms Deal: The BAE corruption bombshell

By Open Secrets & SWI 29 July 2020

The Arms Deal was never only about Jacob Zuma and his sweetheart relationship with French arms company Thales. We now have even more proof that it was rotten to the core and demands accountability.

It is not often that a juicy story comes to you, rather than the other way round. In the past few weeks former SANDF chief General Siphiwe Nyanda has produced a bombshell. Evidence based on internal documents handed to Open Secrets and shared with Shadow World Investigations is tangible proof of a highly questionable relationship between Nyanda and arms fixer Fana Hlongwane. 

The evidence shows that Nyanda received money from a Hlongwane company that was paid “commissions” by British arms mega company BAE Systems as part of the corruption-riddled Arms Deal. With this smoking gun prosecutors can start to dust off the docket on this network and consider prosecutions. The Arms Deal was never only about Jacob Zuma and his sweetheart relationship with French Arms company. We now have even more proof that it was rotten to the core and demands accountability.

In June this year, Open Secrets ran a series of Unaccountable articles focusing on British arms company BAE and two of its mega-agents, Fana Hlongwane and John Bredenkamp, who became rich from the Arms Deal. Bredenkamp died on the day of our publication – but Hlongwane lives on in the lap of luxury. 

Fana Hlongwane – Agent of BAE Systems

Among the considerable evidence that has stacked up against Hlongwane is the peculiar business relationship he had with Nyanda. We noted that in 2005 Nyanda had received a R4.36-million home loan from a company controlled by Hlongwane after Nyanda had left the SANDF, and that the loan “had been written off in 2009 with evidence that there was little to no attempt at repayment, and the loan payment flowed directly from one of Hlongwane’s business accounts”. And while both Hlongwane and Nyanda denied bribery, we concluded that the whole loan business “clearly constituted a serious conflict of interest at the very least”.

Shortly after the piece was published, Nyanda approached Open Secrets to discuss the allegations. Nyanda believed that the whole home loan imbroglio had been misunderstood, and he wanted to set the record straight. Fair enough. In fact, Nyanda pointed out, he had actually paid back the loan, illustrating that any claims of conflicts of interest (or worse) were unfounded. To substantiate his claim, Nyanda sent a sheaf of documents that inadvertently revealed important new details about the home loan granted to Nyanda: information that paints the relationship between Nyanda and Hlongwane in a very different, and very damning, light.

But, before we get to that, we have to go a little bit back in time. Get in the Delorean, clock set to 1999.

Hlongwane, BAE Systems and the Arms Deal

As we’ve described in considerable detail elsewhere, in December 1999 the government purchased a range of expensive and sophisticated military equipment abroad: the Arms Deal. The biggest winners in the Arms Deal were British Aerospace (now BAE Systems) and SAAB. BAE Systems was contracted to supply Hawk fighter trainers, while BAE and SAAB were jointly contracted to deliver the Gripen fighter jet. These highly lucrative contracts were together worth R15.77-billion (valued at about R45-billion today) – more than half the total cost of the Arms Deal at the time. 

Even before the ink on the Arms Deal contracts had dried, serious allegations of corruption began to surface. Many of these allegations remain a big part of South Africa’s political life, including forming a big part of the upcoming corruption trial of Zuma and Thales. 

BAE Systems has been far from immune from allegations of corruption. In 2008, the Scorpions, in the last flick of their tail, raided the properties of Bredenkamp and Hlongwane. The Scorpions raid was motivated by evidence gathered by the UK’s Serious Fraud Office in their probe of BAE System’s involvement in corruption around the world. The SFO had discovered that BAE Systems had made £115-million in payments to overt and covert “advisers” to win its Arms Deal contracts. Bredenkamp and Hlongwane were the two biggest “advisers” in monetary terms. Through various avenues, Hlongwane was paid over R100-million. The SFO believed that the payments had been made by BAE Systems to Hlongwane for corrupt ends.

The BAE ‘tranches’ 

Hlongwane was supposed to perform a range of services for BAE Systems, but one of the most notable revolved around the tranching arrangement entered into between BAE Systems and the South African government.

The tranching arrangement was, like almost everything in the Arms Deal, an absurdity wrapped in irrationality and sprinkled with favouritism. During the Arms Deal negotiation process, the cost and economic implications of the deal were subjected to a macroeconomic review by the Department of Finance that ultimately was contained in what was known as the August 1999 Affordability Report. The review found that the whole Arms Deal was a massive economic risk that threatened to massively increase unemployment if things went wrong. This was in addition to the 300,000 lives lost due to HIV-Aids as the country could not afford anti-retroviral medication at the time due to the Mbeki administrations arms deals.

The Affordability Report was particularly concerned about the huge costs of the Hawk and Gripen contracts. There were serious concerns that, if the market responded badly to the announcement of the Arms Deal, buying the Hawk and Gripens would cause serious economic harm over a considerable period of time, not least because the purchase of the Hawks and Gripens was enabled by huge loans given to the government by Barclays Bank that are only to be repaid in 2022. So, as South Africa continues to struggle through an economic crisis – we are all still paying for the Arms Deal today.

To try and get around the issue of cost and affordability, BAE Systems proposed a tranching system. Under this system, South Africa would buy the Hawks and Gripens in three separate tranches or bunches. South Africa, if it was struggling economically, could decide to halt agreeing to tranches two and three, thus limiting the amount of Hawks and Gripens bought from BAE Systems. Sadly, this system made exactly zero sense. Because of the way the tranches were structured, South Africa would basically have no fighter jet capacity if it cancelled tranches two and three. Moreover, BAE Systems had front-loaded the costs so that the jets in tranche one cost more per unit than in tranches two and three. 

Despite these problems being loudly pointed out in the Affordability Report, which argued strongly that the deals with BAE and SAAB be halted (not least because South Africa had no pilots to fly the things), the government went ahead with the plan. For BAE Systems to earn the full income it was hoping for, it needed the government to agree to sign the tranche two and tranche three purchase orders in 2002 and 2004 respectively.

Fighting for the tranches: Nyanda’s role and Hlongwane’s payday

Nyanda, one of the most well-respected Umkhonto we Sizwe commanders in exile, was appointed as the chief of the SANDF on 1 June 1998, a position he held until his retirement on 31 May 2005. 

Documents from the Arms Deal selection process show that Nyanda was involved in at least one key moment, where he signed a recommendation with the acting secretary of defence that had the effect of reducing the number of helicopters South Africa was buying (arguably the only equipment that was actually needed and has actually been used from the Arms Deal) to accommodate buying the Hawk and Gripens.

And in his position as the chief of the SANDF, he would have almost certainly been directly involved in any decision about whether the government would pursue the second and third tranche options. In response to a question posed to us he indicated in a phone call that such decisions would happen at ministerial level and not involve the SANDF, but this beggars belief. At the very least, the SANDF would have been consulted by the ministry about a decision to proceed and such a recommendation would have had to have passed the desk of Nyanda as chief of the SANDF.

It is here where we find the confluence of financial interest shared between Hlongwane and Nyanda. 

Hlongwane, for his part, would make a great deal of money if the South African government agreed to tranche 3. This was to be achieved through two separate contracts. 

The first was entered into between Hlongwane Consulting and BAE Systems in September 2003, which paid Hlongwane a £250,000 quarterly retainer. In September 2005 this agreement was amended to allow Hlongwane to be paid a once-off “ex-gratia” payment of $8-million (R50.4-million at the time) “in full and final settlement for all additional work regarding Gripen tranche 3”.

The second was entered into between Hlongwane Consulting and SANIP in August 2003. SANIP was a joint BAE-SAAB company that was effectively controlled by BAE Systems from about 2003 onwards. According to this agreement, Hlongwane Consulting was to be paid a bonus of R22.5-million “should the Government not terminate Tranche 3” and should BAE be awarded a particular number of “credits” for its industrial participation programme with the government, known as offsets (a whole other scandal in its own right). This was in addition to a quarterly retainer of R1,875,000. 

Importantly for matters dealt with below, on 1 June 2004, this agreement was altered so that SANIP contracted directly with Ngwane Aerospace, which would now be paid the retainer of R1,875,000. On 23 August 2006, a contract amendment was agreed to pay Ngwane Aerospace a one-off amount of R1,275,000 related to the offset programme.

Hlongwane thus earned R72.9-million in 2004 and 2005 (equal to R172-million in 2020) from the decision of the government to opt for Tranche 3: a decision over which Nyanda would have had direct and material influence.

The Nyanda documents

Despite Nyanda’s stated intention to clear his name, the documents he sent to us did the exact opposite. In fact, they show that Nyanda had agreed loans with Hlongwane’s companies while he was still employed as chief of the SANDF. This represents a clear unmanageable conflict of interest and the type of benefit that could never have been approved – even by his boss, President Thabo Mbeki. We pressed Nyanda on this issue and he responded by email that, “I was not working for the SANDF then and couldn’t have sought their approval or any executive for my actions.” This is of course incorrect. In a follow-up email, Nyanda confirmed to us that his last day of employment in the SANDF was 31 May 2005 – months after the loan was agreed upon.

We also wanted to know why Nyanda didn’t approach a commercial bank for this loan, to which he responded: “Would a commercial bank have given me the loan as quickly as I needed it if at all? Don’t executives in private companies ask for loans from their companies?’. That may well be the case, but he was also chief of the SANDF at the time. 

Nyanda also confirmed in his responses that he began negotiating with Ngwane for the loan as speed was of the essence. Nyanda recalled that “I stopped my search when I saw the house and began negotiating with Ngwane Aerospace for the loan before the house was taken by anyone else.” But the documents sent by Nyanda shows that Nyanda had started making moves to buy the house by at least January 2005; five months before he stepped down as chief of the SANDF. It is striking that Nyanda, in spite of this admission, still believed that he had done nothing wrong.

One of the key documents is a letter from Christo Stockenstrom, Hlongwane’s long-time legal representative, to Nyanda on the letterhead of Stockenstrom’s law firm (FSF). The letter is dated 2 March 2005: nearly a full three months prior to Nyanda stepping down as chief of the SANDF. The subject of the letter was a reconciliation of the full bond amount that Ngwane Aerospace was granting to Nyanda. 

In total, Ngwane Aerospace was to loan Nyanda R4,364,939.24, which was to be used to cover a range of costs. The biggest cost was the purchase price of Nyanda’s new home in Bryanston, Johannesburg, which was recorded as R3.75-million. 

Another large cost – R305,416 – was the money that Nyanda had to pay to the law firm Connie Myburgh & Partners Inc to cover the transfer costs related to the purchase. A separate letter from Connie Myburgh & Partners shows that they had sent an invoice to Nyanda for this amount on 27 January 2005. The loan that Ngwane was agreeing to give to Nyanda in March 2005 thus also covered costs that Nyanda had incurred in January 2005 – just over five months before Nyanda had left the SANDF.

Two related entries in the bond reconciliation are also intriguing: an amount of R250,000 described as a “Medical Protector Compensation Loan” and an amount of R37,500 described as “Plus 15% Interest Per Annum from 1 March 2004 to 1 March 2005”. A simple calculation shows that the R37,500 was equal to 15% of the R250,000 “Medical Protector Compensation Loan”. Nyanda responded to questions as to what this loan was intended for by stating that, “It was a private venture of mine which failed. It had nothing to do with government and has nothing to do with any public interest. I had to pay the loan with interest as well as the documents show.”

But did he not have to seek approval from the Ministry of Defence or the executive for a private business venture while employed as chief of the SANDF? Nyanda expanded to say that there was no need for approval. “This has nothing to do with a public entity.” If this was not declared, it would suggest that at the very least the general was engaged in a serious case of moonlighting while employed in a powerful, well-paid position in the public service.

If this is accurate, it is even more damning: it shows that the amount loaned to Nyanda by Hlongwane included covering costs incurred by Nyanda from at least March 2004. This was over a year before Nyanda stepped down from the SANDF, and, most importantly, a month before the government renewed Tranche 3, which was formally completed in April 2004. 

A careful reader would have noticed another important detail: the bond that was given to Nyanda was granted to him by Ngwane Aerospace. As we discussed above, in July 2004, Ngwane Aerospace replaced Hlongwane Consulting as the entity through which Fana Hlongwane would be paid a quarterly retainer of R1,875,000 until August 2006. The company from which Nyanda received his bond was thus the very same company that BAE Systems was making payments to, during and after Nyanda served as chief of the SANDF.

What about the claim that Nyanda repaid the loan? Here, Nyanda’s claim is both true and entirely disingenuous. A reconciliation of Nyanda’s bond shows that Nyanda made two large payments to pay off a portion of the bond: R659,278 in June 2005 and R2.5-million in January 2006. Nyanda indicated in a response to a question that the source of these funds was from his early retirement package from the SANDF which took time to clear. By April 2007, Nyanda owed R1,668,802.80 on the loan, which, paid over 20 years, would cost R17,255.19 a month.

In April 2007, Nyanda wrote to Janet Collier at Ngwane Defence Group, another Hlongwane company, and where Nyanda was employed as CEO almost immediately after he left the SANDF. As an interesting and revealing aside, Janet Collier was the partner of Bernard Collier. Bernard Collier was previously the man who controlled the day-to-day running of SANIP, and who signed the consultancy agreements between SANIP and Hlongwane Consulting (and later Ngwane Aerospace).

Nyanda instructed Collier to “please transfer the whole amount of my monthly salary” to Ngwane Aerospace, “the amount being repayments for my bond”. Nyanda instructed the payments to take place every month for 20 months. A second reconciliation of the bond shows that Nyanda did, indeed, transfer his entire monthly salary – just over R70,000 – until December 2009.

What this meant, in reality, was that Nyanda did repay the bond. But he was repaying Ngwane Aerospace with money paid to him by Ngwane Defence. Nyanda was thus repaying Ngwane Aerospace, which was paid massive consultancy fees by BAE Systems between 2004 and 2006, for a bond he agreed with Fana Hlongwane’s company Ngwane Aerospace in March 2005, with money paid to him by Fana Hlongwane’s Ngwane Defence. 

Did Nyanda see this as worrisome or potentially having criminal implication? Seemingly not. Nyanda responded by email to say that, “I paid interest. Many executives take very soft loans from their companies….If this is criminal conduct many people would be in jail.” 

Nyanda explained away his relationship to the Hlongwane family as being separate and distinct from the Arms Deal. He bought goods as a young man from the Hlongwane family’s shop – and he would in turn eventually take Fana Hlongwane under his wing in the days of exile and struggle. These ties are understandable and not criminal. But they do not excuse a sitting chief of the SANDF negotiating a home loan with an agent of BAE – the company that received the largest ever post-apartheid military procurement contract. 

The Arms Deal is dead, long live the Arms Deal

As democratic South Africa’s first example of State Capture, the Arms Deal enabled the foetid institutional decay that allowed the Gupta family and their accomplices to loot the South African purse. Our liberators were replicating the types of economic crimes that the apartheid regime had become a world leader at.

Twenty years later, almost no one has faced any meaningful accountability from the Deal. Only Tony Yengeni, imprisoned for less than a year, and Schabir Shaik, released on farcical medical parole, have ever faced jail time. Thales and Zuma, due to face corruption charges next year, have lived storied and merry lives in the interim. This is a situation favoured by global corporations like BAE and Thales and the politicians and middlemen they have enriched. We call it impunity.

Meanwhile, those responsible for investigating South Africa’s defining corruption scandal have either been beaten, bloodied and betrayed by political interference at home and abroad, or, in the case of the Hawks and the lamentable Arms Deal Commission led by Justice Seriti, content to whitewash the indefensible.

But if anything, this story shows that, despite these attempts, the evidence of crimes in the Arms Deal will never go away. Not until justice is done. The pungent relationships between BAE Systems and Fana Hlongwane, and between Hlongwane and Nyanda, might be a good place to start. DM

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