State may have paid millions to arms company for phantom work, report shows

African Defence Systems (ADS), the company at the heart of the arms deal controversy, is back in the spotlight. A confidential report by state procurement agency Armscor shows ADS invoiced, and was paid hundreds of thousands, possibly millions, of rand by government for work not done or that was substandard in the 1990s.

ADS denied doing anything irregular when the allegations first surfaced in 2000. It claimed it was the target of a hate campaign by a former employee. Investigations and inquiries by other state agencies, including the National Prosecuting Authority, the police and the specialised commercial crime unit, have found no case for criminal prosecution.

But questions persist about whether Armscor is involved in a cover-up - whether its report deliberately underplayed its role and that of ADS in the profligate spending of taxpayers' money on projects aimed at sustaining the arms industry more than enhancing SA's military defence capability.

The Armscor report states that "deficiencies (some minor and some of concern)" existed in ADS's undertakings to upgrade the SA Air Force's Cactus surface-to-air missile system . The report was released under an application for access to information after 18 months of resistance by Armscor management. Addenda have still not been released.

Armscor launched its investigation after fraud charges were brought against ADS by Fritz Louw, a systems manager who ran the software component of the upgrade for ADS, and who was fired for alleged misconduct in July 1999. Louw's complaints cover the period from 1993, when ADS was wholly owned by the Altech group, to 1999, the year after French defence company Thomson-CSF bought 50% in its first step towards taking control.

Thomson's SA directors include Schabir Shaik, brother of the former head of defence procurement, Chippy Shaik, who was forced to resign over conflict of interest allegations after ADS won the prime contract to build the combat suites for SA's new navy corvettes.

ADS's operations GM, Charles Strachan, was abroad and could not be reached for comment this week. But in an affidavit filed in May 2000, Strachan rejected all of Louw's allegations and suggested he was motivated by bitterness at losing his job.

Louw acknowledges his relations with his employer soured over several months as he complained repeatedly about irregularities. In a meeting with his bosses he angrily tipped over a table, leading to his dismissal. But he insists the charges point to a longstanding pattern of fraudulent behaviour .

In his charges, Louw lists 72 cases where ADS received payment for work not done, or which was completed in subsequent contracts, was substandard or was double-invoiced. The payments totalled R3,5m.

The review board that wrote the Armscor report found no instance of fraud or collusion between ADS and Armscor. But the six Armscor managers and one air force acquisitions officer were not able to refute 26 of the charges, involving R2,6m.

Armscor spokesman Bertus Celliers said this week the agency sent its report to the Scorpions special investigating unit shortly after it was completed and heard nothing further. "Armscor regards the matter as closed," he said.

But Louw says the board's conclusions do not support its own findings. He calculates that ADS owes taxpayers a further R1,1m in compound interest in refund of payments for uncompleted work - a matter not addressed by Armscor or the defence department.

To date no refunds or penalties have been demanded by the state. Armscor said on February 2 2001 that ADS had delivered all outstanding work for which it had received early payment.

"The point is: would anybody have done anything if I had not blown the whistle?" asks Louw.

Former ADS CEO, now deputy chairman of Thomson in SA, Pierre Moynot, said this week ADS had not been asked to pay back any money or discipline any staff because it was not implicated in wrongdoing. He believed Armscor had only found "some disrespect of internal Armscor procedure".

The Armscor board's report, with its technical analysis and familiarity with procurement procedure, seems to have been accepted by other investigating authorities as the key to their own inquiries. Yet the report itself is open to question, as it amounts to Armscor investigating itself, for the agency stands accused of colluding with ADS in improper payments.

From the outset the report seems bent on disproving, rather than substantiating, Louw's allegations. For instance, it takes the view that "many of the allegations could be refuted", not that many were true. While it acknowledges that some early payments "were both irregular and nonprocedural" it states vaguely that "these actions do not necessarily indicate collusion". It also does not explain why some of the "deficiencies" do not amount to fraud.

Its remedy is to recommend procedural improvements in the management of arms programmes and contracts, both in Armscor and ADS. It asks the Armscor management board to decide whether to refer the matter to the police or Special Investigating Unit (formerly the Heath Commission).

Auditor-general Shauket Fakie (photo on left) says his office asked Louw earlier this year to provide evidence the Armscor report was flawed, and his office would "reconsider all the options available".

Defence minister Mosiuoa Lekota did not reply to the FM's inquiries, redirecting them instead to Armscor.

Meanwhile, at least three former colleagues of Louw back up his claims . But none of them has ever been contacted by government investigators.

With acknowledgements to Peter Honey and the Financial Mail.