Arms Deal "Riddled with Corruption" |
| Publication | Woza |
| Date | 2000-10-11 |
| Editor | ECAAR |
| Web Link | www.woza.co.za |
Report submitted to parliament's Standing Accounts Committee
By Economists Allied for Arms Reduction
The government proposes to spend R48 billion on armaments at a time when there is no foreign military threat to South Africa, and the majority of our citizens suffer acute poverty. The justification for such expenditure is said to be offsets worth R110 billion.
The armaments industry is internationally notorious for corruption. Offsets, which are pivotal to the government's industrial development programme, are a scam promoted by the armaments industry to fleece taxpayers of both supplier and recipient countries. International experience shows that the only function which offsets perform for recipient countries is to provide legitimisation for the large outlays required on modern defence systems by allowing policy-makers to point to apparent, but ultimately non-existent economic benefits.
Allegations and evidence of corruption were forwarded to the Heath Special Investigating Unit in November 1999. The Heath Unit acknowledged the gravity and sensitivity of the allegations. It is now September 2000, and it is public knowledge that heavy political pressures are being applied to close down the Heath Unit. The auditor-general's report just presented to parliament has found very serious shortcomings in the acquisition processes in at least five areas:
The allegations submitted to the Heath Unit are extremely wide-ranging, and indicate attempts at massive self-enrichment by former leaders of Umkonto weSizwe and political associates. There also appear to be linkages between the armaments acquisition programmeand the Cell C cellphone tender through both the personalities involved and new generation electronics and smart card technology. The Conventional Arms Control Bill just withdrawn from parliament would have provided indemnity to the state for criminal activities. It also invoked a culture of secrecy reminiscent of the apartheid era, and would have prohibited public disclosure of allegations and information such as contained in this document. This is of major concern given the government's intentions to reintroduce the Bill next year, and to export armaments to countries such as Saudi Arabia, India and Pakistan. It is also alleged that an international conspiracy similar to that of the BCCI frauds of the early 1990s is involved. The scale of such corruption requires thorough and transparent investigation.
Non-Delivery of the RDP
SA's first democratic government came to office in 1994 committed to move rapidly with its Reconstruction and Development Programme to redress the socio-economic legacies of apartheid. Education, health services, housing and job creation were to be its priorities. Six years later, South Africa's education and health services are in chaos. Eight million people live in shacks in disgraceful conditions, and the economy has shed one million jobs. It is generally agreed that South Africa needs an annual growth rate of about 8 percent to redress the crises of poverty. Annual growth in GDP was forecast at 6 percent by the year 2000. Instead, during the first quarter of this year it was a feeble 0.9 percent and 2.2 percent during the second quarter.
The repeated excuse for the non-delivery is lack of financial resources. Income inequality, by which South Africa already ranks as one of the worst in the world, has deteriorated sharply in recent years - ie the "rich are getting richer, the poor are getting poorer." Unemployment in South Africa is estimated at about 35 percent. The rand has collapsed from R3.60 per $1 in 1994 to R7.30 per $1. Rather than foreign capital inflow, there has been massive capital flight by South Africans, most notably Old Mutual and Anglo-American Corporation which - with Reserve Bank encouragement - have transferred their domicile to England.
There is no conceivable foreign military threat to South Africa. Yet the government, while repeatedly pleading financial constraints, has embarked upon a massive rearmament programme. Expenditure on armaments worsens South Africa's national and foreign debt problems, and compounds the poverty which afflicts the majority of South Africans.
There is said to be no funding available for reparations to the victims of apartheid as promised by the Truth and Reconciliation Commission, or to combat HIV/AIDS. Yet although there is no foreign military threat to South Africa, the government proposes to spend R48 billion on warships, warplanes, tanks and a ground-based air defence system. Nothing so illustrates the sense of betrayal of expectations that there is money for armaments but not for social upliftment.
The Rearmament Programme
In 1995 the South African Navy had proposed to buy four Spanish corvettes at a cost of R1.7 billion (compared now with four German frigates for R6 billion). The proposal was aborted because of public outcry that demanded houses and schools before expenditure on warships. In return for the purchase for R1.7 billion, the Spaniards were to provide offsets worth R4.8 billion which, it was declared, would create 23 000 jobs.
In addition to increasing Spanish purchases of coal, the proposals focussed on the development of South Africa's fishing industry amongst underprivileged communities. Essentially, Spain proposed to build 30 fishing trawlers and to fund them with low-interest foreign currency loans. They would also build two massive fish processing factories on the Cape West coast, with a guarantee to buy the fish for export to Spain. Fishing industry analysis of the proposals calculated that the annual harvest of hake required to make the two factories economically viable would have to increase from 140 000 tons to 250 000 tons. The consequence of such overfishing would have been the final collapse of our fishing industry, which employs about 85 000 people. Only very narrowly and because of public protest did South Africa gain a respite from the Spanish corvette proposals, and the 23 000 jobs that they were supposed to create. The case illustrates, however, the unintended consequences of offsets promoted by securocrats at Armscor and bureaucrats at the department of trade and industry.
Announced in November 1998 as costing R29.8 billion, the weapons acquisition programme is already re-estimated as costing R48 billion. The justification for such expenditure was that "offsets" by the European armaments companies would make it affordable through investments and exports worth R110 billion which would create 64 165 jobs. Jayendra Naidoo was contracted by the Cabinet to negotiate the procurements: even he concedes that job creation will fall very substantially short of 64 165 jobs.
In addition to acquisitions of warships and warplanes for R32 billion, a further R16 billion is to be spent on tanks, military vehicles and ground-to-air missile systems. The secret and as yet unannounced Ground Based Air Defence System (GBADS) is considered to be a "poor man's version" of America's controversial Missile Defence System. GBADS is intended to provide South Africa with protection against missiles launched anywhere in the sub-continent.
Offsets, an Invitation to Corruption
Offsets are promoted by Armscor and the department of trade and industry (DTI) as pivotal to South Africa's industrial development. The practice - a complicated form of barter - is, however, internationally discredited as an invitation wide open to corruption. The DTI has required offsets since 1997 in terms of its Industrial Participation Programme for all government foreign acquisition projects worth over $10 million. International experience is that the only function which offsets perform for recipient countries is to provide political legitimisation for the large outlays required on modern defence systems by allowing policy-makers to point to apparent, but ultimately non-existent economic benefits.
The auditor-general's report notes that performance guarantees required from contractors averaged 10 percent of the contract price. He declares: I am of the opinion that the guarantees, in the case of non-performance, may be inadequate to ensure delivery of the National Industrial Participation commitments. This could undermine one of the major objectives of the strategic defence packages, which was the counter-trade element of the armaments package deal.
International experience is that armaments companies first raise the prices of the equipment to compensate for the nuisance of the offsets and guarantees, but then walk away from the commitments once the weapons contracts have been secured. In addition, it is argued that were the industrial investments economically viable, they would stand on their own merits rather than be conditional upon armaments acquisitions.
In short, offsets are a scam promoted by the armaments industry to fleece the taxpayers of both supplier and recipient countries. They are prohibited in civil trade arrangements between the EU and Nafta in terms of the General Procurement Agreement, but the politically influential armaments industry has so far managed to retain an exemption. The United States is known to have objected to offsets being applied to Boeing's tenders for new aircraft for SA Airways.
South African taxpayers will be responsible for the expenditure on armaments, but are prohibited from details of the related offsets contracts in terms of contractual "commercial confidentiality clauses." Even the DTI concedes that its capacity to monitor compliance with the intended offsets of R110 billion is completely inadequate. During Swedish Prime Minister Goran Persson's visit to South Africa in November 1999, his adviser Roger Hallhag admitted that offsets are internationally discredited precisely because they are so open to corruption. Hallhag justified the use of offsets in the weapons procurements programme, saying that "lower standards apply in third world countries"!
It is extraordinary that such a discredited malpractice is promoted by the DTI, and is now obligatory government policy. The European Union's Code of Conduct on Arms Exports requires under Criterion Eight that socio-economic conditions in recipient countries must be considered before weapons exports can be approved. Given the poverty which prevails in South Africa, European governments have evidently cast a blind eye to that requirement. There is, however, a long history of corruption in the European armaments industry which continues to exert enormous influence over European politicians. A few examples are:
It has not been illegal in Europe to bribe foreign officials in pursuit of export contracts. It has, for instance, been alleged that BAe Systems in January 1999 paid a first "success fee" of £1 million to a number of South African politicians and officials - including Mr Tony Yengeni, then chair of the Parliamentary Joint Standing Committee on Defence and now the ANC's Chief Whip.
Other allegations regarding BAe Systems payments to shopstewards of the National Union of Metalworkers of South Africa (Numsa) were also referred to the British government and police. The British government, however, has for over three years been stalling on implementing the OECD Convention on corruption laws. Accordingly, British police investigations were dropped because no crimes had been committed in England.
A Transparency International report noted that corruption in the "third world" usually originates in the "first world." A Pugwash report on "Human Security in the Southern African Context" notes: "Corruption, while prevalent in developed countries too, is particularly harmful in developing countries which tend to have fewer resources to address the problem - which are now wasted or not used in the most effective or equitable way.
"Corruption impacts severely on human security. It threatens economic growth, efficiency and social development; creates significantly higher levels of risk and uncertainty in economic transactions; distorts public expenditure in that it diverts scarce resources to lesser or non-priorities; acts as a disincentive, possibly deterring prospective economic activities and investment; and stifles private initiative and enterprise.
"Corruption thus becomes both the cause and consequence of underdevelopment and poverty in general.
"Politically, corruption is often a consequence of the unaccountable monopoly of power of authoritarian and totalitarian regimes. Where representative processes to enforce governmental accountability are weak or non-existent, political structures provide the greatest opportunities for corruption.
"These exist where there is an absence of political mechanisms through which a government that tolerates, condones or participates in rent-seeking and corrupt practices, might be dismissed.
"The political impact is such that an electorate's perception of widespread corruption may eat away at the popular legitimacy and trust of the government. Corruption is the antithesis of good governance."
'If you want Peace, Prepare for War'
The old guard of the apartheid-era SADF had lobbied successfully during the 1996-1998 Defence Review for a core force of technologically advanced equipment. The military establishment remains wedded to archaic and apartheid-era perceptions that "the world is a dangerous place" and that expenditure on armaments is merely a form of insurance.
The SA Navy attempted to justify purchases of submarines with bizarre explanations that they would be "the ultimate stealth weapon to protect fish," and that South Africa needed the capacity "to give the Americans a bloody nose." Further motivation for military expenditure was the expectation that South Africa would play a leading role in peacekeeping operations in Africa. The debacle in Lesotho and the repercussions of Zimbabwe's misadventure in the Democratic Republic of Congo have completely discredited such ideas.
Another agenda was that these acquisitions would be funded by retrenching about 70 000 personnel. The Tempe and Phalaborwa incidents have confirmed the acute and continuing racial tensions within the SANDF. Warnings that retrenchment of ill-educated soldiers might lead to banditry have been substantiated by the arrest and conviction of a former MK soldier who was involved in the Cape Town bus shootings, and other crimes. The auditor-general notes that no consideration had been given to the staff required to operate the new warships and warplanes. The requirement for well-educated personnel to operate the high-tech equipment sought by the SANDF would exclude a high percentage of the former "non-statutory" forces.
Consequently, on September 18, 2000 the minister of defence raised a prospect in parliament of the reintroduction of conscription. The purpose would be to obtain the educated personnel required for high-tech equipment, including pilots for the aircraft and technicians to maintain the GBADS. South Africa's unhappy experience of conscription during the apartheid era included its highly negative economic consequences. Human security instead of military security NGOs - including the Coalition for Defence Alternatives (CDA) - had argued at the Defence Review that there is no conceivable foreign military threat to South Africa, but that the real threat to security and the transition to democracy is poverty.
They declared that human security relating to people required priority over the traditional notions of military security relating to states. Housing, education, health services (including the need to address the HIV/AIDS pandemic), policing/crime prevention and jobs are much more relevant to average South Africans than any prospect of military attack by neighbouring countries.
The South African Constitution similarly favours this more modern approach to security when it declares in
terms of governing principles under Chapter 11:
"National security must reflect the resolve of South Africans, as individuals and as a nation, to live as equals, to
live in peace and harmony, to be free from fear and want, and to seek a better life."
The CDA also declared publicly that the only logical explanation for the acquisitions and offsets is corruption and, together with Archbishop Njongonkulu Ndungane and others, unsuccessfully called upon the government to establish a judicial commission of inquiry to investigate the matter. In June 1999 the CDA was approached by ANC intelligence operatives on behalf of ANC MPs who believed that weapons expenditures represented a betrayal of the socio-economic upliftment anticipated by South Africa's impoverished communities. The ANC operatives declared that they had knowledge and evidence of massive corruption involving senior politicians and government officials.
The CDA's response was that this would be in keeping with international experience of corruption relating to the armaments industry, but that the CDA was not competent to judge such allegations. In September 1999 a memo addressed to Patricia de Lille, MP by "concerned ANC MPs" resulted in a panic by government ministers and officials to identify the "whistleblowers" who, not surprisingly, "went to ground."
The minister of defence even attempted, but failed, to browbeat Archbishop Ndungane into revealing their identity. Accordingly, in November 1999 the allegations and evidence were forwarded by Patricia de Lille MP to the Heath Special Investigating Unit. The Heath Unit announced that it would be making its findings by January 2000. Its investigators advised that the evidence linked and corroborated some of their other investigations.
Some of the Allegations
It is now October 2000, and it is public knowledge that massive political pressures have been applied to close down the Heath Unit. The Public Protector, Selby Baqwa has been requested to intervene on behalf of the Heath Unit. It is understood from sources close to British military intelligence that President Thabo Mbeki is himself endeavouring to close down the Unit because it has uncovered corruption involving government ministers and his own brother, Moeletsi.
Moeletsi Mbeki is a director of Makhosi Holdings, which is involved in the controversial Great Lakes rail/ferry proposals. He is also a director of Paramount Logistics, which apparently includes Marc Rich - the American financial fugitive in Switzerland who was also one of the leading oil sanctions-busters during the apartheid era. Moeletsi Mbeki is also reported to have become a director of BAe Systems South Africa.
It will be recalled that British Aerospace "drove" the £20 billion Al Yamamah weapons-for-oil deal between
Britain and Saudi Arabia, and consequently became involved in the oil distribution business. Mrs Thatcher
and her son Mark (who is now resident in South Africa) were reported to have been handsomely compensated for
their roles.
It is now alleged that BAe Systems will use South Africa as a conduit for the international trade in
weapons-for-oil. Saudi Arabia's experience with the economic "benefits" of offsets should be
a salutary lesson to South Africa. In terms of the Al Yamamah contract, offsets were supposed to create 75 000
high-technology jobs for Saudi Arabians. Instead, only 1 600 jobs resulted from the offsets, of which 1 300
were filled by imported expatriates and only 300 medium/low-technology jobs by Saudi Arabians.
Shamin "Chippy" Shaik is the director-general responsible for acquisitions in the department of
defence. Chippy Shaik and his three brothers, Mo (SA's Ambassador to Algeria), Shabir (fundraiser for the ANC and director of
African Defence Systems) and Younis (head of CCMA and a director of the Cell C consortium) are also
allegedly severely compromised.
Related to the weapons acquisition programme is the contested Saudi Arabian-financed Cell C cellphone licence application. It is said to be an attempt for massive personal enrichment by MK leaders including the former Minister of Defence Joe Modise and the former head of ANC military intelligence and now director of Armscor, Keith Mokoape. The chairman of Cell C's holding company is Lt General Lambert Moloi, previously of MK (Modise's brother-in-law) and now also chairman of Futuristic Business Solutions and a director of Denel.
Moloi's other business interests are alleged to include supplies of weapons, mercenaries in Africa and related "protection" contracts in partnership with a perpetrator of apartheid-era atrocities, Special Branch Colonel Alf Oosthuizen. Modise is alleged to have received payment of R10 million for his signature to the German submarine contracts. The submarine offsets were originally promoted as being worth R30.274 billion which would create 16 251 jobs.
The submarine contracts were central to the proposed Coega deep water harbour near Port Elizabeth, and construction by the German company Ferrostaal of a US$1 billion stainless steel plant as the anchor project. The Coega proposals have been fraught with controversies as being a white elephant comparable to Mossgas. The stainless steel plant project has condemned by analysts as financial and environmental disaster-in-the-making. Ferrostaal is already backing away because a second stainless steel plant in South Africa is simply not economically viable. A common feature in the linkage and "spider's web" between the armaments and the cellphone industries is new generation electronics and "smart card" technology, and involvement of former Umkonto weSizwe (MK) leaders who are using the rearmament programme and cellphone tender for massive self-enrichment.
Futuristic Business Solutions has minimal capacity. It has nonetheless been designated as one of the prime coordinators of the acquisition programme in conjunction with African Defence Systems (ADS), in which it has a 20% shareholding. ADS, although posing as a black empowerment company, is otherwise owned by the French armaments industry company Thomson CSF, but includes Shabir Shaik as a director.
The Saudi relationship with South Africa has grown exponentially since 1994, with some two-thirds of South Africa's oil imports now being procured from Saudi Arabia. Denel is hopeful of selling G6 artillery systems to Saudi Arabia for US$1.5 billion against delivery by Saudi Arabia and construction in South Africa of a fifth oil refinery.
Secrecy Breeds Corruption
Disclosure of such oil-for-weapons deals with countries such as Saudi Arabia would be prohibited in terms of article 23 (1) of the newly-introduced and withdrawn Conventional Arms Control Bill. This provision is particularly ominous given the history of corruption that characterises the armaments industry, and the South African armaments industry in particular. It is reminiscent of the obsessive secrecy of the apartheid era, and primarily intended to protect the state-owned Armscor and Denel.
Details of Armscor's involvements in the Helderberg plane crash and in the apartheid-era chemical and biological warfare programme even now are forbidden to the South African public. Evidence at the Truth and Reconciliation Commission hearings and the trial of Wouter Basson have illustrated the criminality that characterises the armaments industry. Article 24 of the Bill would provide the State and/or Armscor and Denel with indemnity for criminal liability in such cases.
Denel portrays itself as being at the cutting-edge of South African technology, and as being a leading export manufacturing company. In fact, much of its technology has been pirated from the United States and other countries, and exports of armaments amount to less than one percent of South African exports. Indeed, despite massive government support in R&D and marketing, Denel is a recurring financial disaster. For instance, not one export contract has been won for the Rooivalk attack helicopter despite the billions of taxpayers' funds that have been squandered on that project. The Group recorded losses for the financial year 1998/99 of R745 million and during 1999/2000 of R206 million.
Denel's hopes of future profitability hinge upon the offset programmes, and of selling G5 and G6 artillery to countries such as India and Saudi Arabia. Denel anticipates that it will be one of the major beneficiaries of the government's R48 billion rearmament programme, with offsets accruing of at least R14 billion. BAe Systems is expected to purchase a 20 percent shareholding in Denel Aviation.
The Cell C award to Saudi interests led by Saudi Oger is also alleged to be in reciprocity for Saudi contributions to ANC campaign funding since 1990, and also to be linked to a sale for R8 billion of South African G6 artillery systems to Saudi Arabia. The principal of Saudi Oger is Rafik al-Hariri, a former Lebanese Prime Minister who became a billionaire in Saudi Arabia. Al-Hariri was dismissed from office two years ago because of alleged corruption, but has just been re-elected in this month's election in Lebanon.
On July 28 the Pretoria High Court granted an urgent interdict to rival bidder Nextcom against Cell C on the basis of "executive interference" by Communications Minister Ivy Matsepe-Casaburri in the selection process. The case will return to court in October.
Prince Bandar, the Saudi Arabian Ambassador to the United States and apparently an aspirant to the Saudi throne, maintains close relationships with the South African government including President Mbeki. He is alleged to be an agent for Lockheed Martin, and to have made his money as a facilitator for American armaments exports to Saudi Arabia. The name of Shezad (Shezi) Naqvi is prominent in these dealings. Who is Shezi Naqvi? Most pertinently, is he connected to Swaleh Naqvi of BCCI? Al-Baraka Bank is reportedly the banking conduit for these arrangements. Al-Baraka Bank was established in 1984 in Bahrain in accordance with Islamic Shari'a banking concepts. It operates in 33 countries, and includes a branch in Cape Town.
Members of the Saudi royal family are also reported to be tendering through Al-Baraka Bank to buy the Denel subsidiary, LIW. The United States Senate conducted an investigation into the affairs of BCCI Bank, which was owned by the royal family of Abu Dhabi but operated by Pakistani bankers resident in Abu Dhabi. The bank collapsed in 1991 following intervention by the United States. The Executive Summary of the Senate investigation describes BCCI's operations:
"BCCI's unique criminal structure - an elaborate corporate spider's web with BCCI's founder, Agha Hasan Abedi and his assistant, Swaleh Naqvi, in the middle - was an essential component of its spectacular growth and a guarantee of its eventual collapse.
"The structure was conceived by Abedi and managed by Naqvi for the specific purpose of evading regulation or control by governments. It functioned to frustrate the full understanding of BCCI's operations by anyone.
"BCCI's criminality included fraud by BCCI and BCCI customers involving billions of dollars; money laundering in Europe, Africa, Asia and the Americas; BCCI bribery of officials in most of those locations; support of terrorism, arms trafficking, and the sale of nuclear technologies; management of prostitution; the commission and facilitation of income tax evasion, smuggling and illegal immigration, illicit purchases of banks and real estate.
"Unanswered questions include BCCI's financing of commodities and other business dealings of international criminal financier Marc Rich."
That Marc Rich's name is apparently now associated with Moeletsi Mbeki's is further cause for concern. It has been suggested that BCCI's operations are now being re-invented through Al-Baraka Bank, the Saudi Oger Cell C tender and other Saudi funding of the ANC. Money laundering, drug trafficking, arms trafficking are but some of the allegations which need to be investigated.
Recommendations
Minister of Finance Trevor Manuel issued South African government guarantees for the purchase of the warships and warplanes in January 2000. In turn, the British government Export Credit Guarantee Department and German government Hermes underwrote the acquisitions.
If, as appears evident, the process has been riddled by corruption, the underlying contracts would normally in terms of commercial practice be considered to be null and void. It is therefore relatively straightforward for the South African government now to repudiate the acquisition contracts and consequent guarantees as being fraudulent.
The practical result would be the cancellation of the R32 billion weapons contracts, as the European armaments companies would not be prepared to proceed without ECGD and Hermes guarantees. The further expenditure of R16 billion on GBADS would probably also fall away once the corruption has been exposed.
With acknowledgement to ECAAR and Woza.