Taiwan’s Frigate Corruption Investigation: Can they Collect?

Kang Ding w. SH-60
(click to view all)

In 1991, Taiwan’s $2.8 billion buy of 6 Kang Ding Class multi-role stealth frigates from France, purchased the navy’s current high-end surface combatants. These ships are derivative of the Lafayette Class, which has been used as the base platform for several nations’ frigate designs – but they have critical weaknesses due to technologies not transferred to Taiwan.

That’s not the only weakness associated with this purchase. A major bribery scandal involving hundreds of millions of dollars has percolated for several years – and is also associated with a murder. It’s now associated with a demands for around $950 million in fines, most of which is already owed by Thales and the French state under international court rulings. The rest is tied up in a 2nd lawsuit, against DCNS.

The Scandal

In brief, Taiwanese authorities allege that French state-owned Elf Aquitaine paid bribes through French firm, Thomson-CSF (now Thales), to persuade French and Taiwanese authorities to approve the sale of the warships. Taiwan’s original plan had involved cheaper 2,000t coastal defense frigates from South Korea, and the project was well under way by 1991 when it was suddenly dropped in favor of buying 6 larger and much more expensive 3,000t frigates based on the Lafayette Class, and equipped with electronic gear built by Thomson-CSF (now Thales). A plan to have the frigates built in Taiwan was also scrapped shortly after the deal was signed, and the work reassigned to France.

Investigations reportedly began after Taiwanese authorities concluded from the inflated price that the deal constituted a serious case of international corruption. The atmosphere was already ripe for investigation, however, thanks to a murder.

Naval Captain Yin Ching-feng, who is believed to have been ready to blow the whistle on the corruption, was murdered in the course of the Elf Aquitaine affair. Taiwan’s military coroner initially ruled it a suicide, but the family hired its own report, which offered conclusive evidence of murder. The French firm Thomson-CSF’s (now Thales) Taiwan agent Andrew Wang has been charged in absentia with the crime, and subsequent reports by the Taiwanese government would conclude that the military had obstructed the murder investigation.

In 2005, Defense Aerospace reported that Taiwan has asked Switzerland to return $520 million (SFr 646.7 million) frozen in Swiss banks, on the grounds that this represents their damages. Switzerland has provided Taiwan and 2 other involved countries with a collection of bank files related to the Lafayette deal. The files include 46 bank accounts under the names of Andrew Wang, his 3 sons, and Wang’s company, all of whose accounts had been frozen by the Swiss Federal Court. Authorities in Liechtenstein had frozen a further $27 million.

A French investigation into the deal was consistently blocked within France, and dropped in 2008 for “lack of evidence.” High-level confessions have made that account somewhat laughable, and in May 2010, an international court of arbitration rules that the frigate contract’s Article 18 anti-corruption clause had been violated. Under the contract, that makes the vendors liable to repay all bribes, plus associated interest and legal fees.

That total is now over $800 million, and Wang’s seizable accounts have also grown in the interim. It is possible that Taiwan could receive over $1 billion as a result of repayments in this case.

Key Events

Latest salvo
(click for Kang Ding)

April 17/14: Supreme Court. The Supreme Court yesterday finalized disgraced Navy Captain Kuo Li-heng’s verdict, but there are still some loose ends and a lot of collection work left. The sentence is 15 years in jail, NT$ 200 million (about $6.6 million) in fines, and the return of NT$ 10.4 billion (about $341 million). On the other hand, all they’ve managed to recover so far is $35 million in frozen assets. They’ll have to go after the rest in Switzerland, and possibly elsewhere.

A final and unappealable court ruling is likely to be helpful from Switzerland’s point of view, but how much is still there? Meanwhile, the new Criminal Code that restricts sentences to 20 years (q.v. Dec 3/13) means that Li-Heng won’t be jailed again. He might get 6 months compulsory labor if he comes to the prosecutor’s office as directed, and can’t pay the NT$ 200 million fine.

One person who will serve some prison time is his brother Kuo Wen-tien, who was fined NT$ 10 million (about $327,850) and will serve 2 years in prison as an accessory for setting up the Swiss accounts to hide the money. Sources: Taiwan’s China Post, “Lafayette scandal ruling finalized; Kuo to return NT$10.4 billion”.

Final ruling

Dec 17/13: Taiwan is still looking to reclaim about $340 million from Swiss accounts belonging to former Capt. Kuo Li-heng and arms broker Andrew Wang, now that Taiwan’s High Court has formally declared Kuo an accomplice in the scheme.

FOCUS Taiwan says that about $700 million remains frozen in Swiss bank accounts under a formal 2001 judicial request. Switzerland has agreed to send criminal funds back to Taiwan, but that requires final verdicts, judicial agreement, and associated processes. The ruling by the High Court to retrieve the funds has now been appealed to the Supreme Court, but Taiwan will still deliver the High Court’s decision to Switzerland through judicial channels. It’s up to the Swiss to decide what they want to do. Sources: Focus Taiwan, “Taiwan seeks recovery of frozen funds from frigate scandal” | Taiwan’s Want China Times, “Taiwan to recover frozen assets from Lafayette scandal”.

Dec 3/13: GOOJF. Taiwan’s changes to its military justice system had an immediate effect on Capt. Kuo, who was released under a clause in the civilian Criminal Code that limits a prison term to a maximum of 20 years. Kuo is over 70 now, and has reportedly told authorities very little about anything, including the murder of his superior, Capt. Yin Ching-feng:

“More than a dozen Taiwanese and Frenchmen have died under suspicious circumstances since Yin’s body was found by local fishermen Dec. 10, 1993 in waters off Taiwan’s east coast town of Suao. In addition to his possible knowledge about the Yin case, Kuo may have huge amounts of money stashed away somewhere. Prosecutors believe he and arms broker Andrew Wang received kickbacks worth US$520 million.”

Sources: Focus Taiwan, “Talk of the Day — Kuo Li-heng free; mysteries still unsolved”.

Aug 15/13: Civilian justice. Taiwan changed its Code of Court-Martial Procedure, whereby all military service members will be subject to civilian justice in peacetime. The wisdom may be questionable, but it passed the Legislative Yuan on Aug 6/13, and was signed into law on Aug 13/13. The change includes already convicted members, so they were transferred to civilian jails:

“Among the military inmates transferred to civilian prisons were three two-star generals, two one-star generals and Navy Capt. Kuo Li-heng, who was put behind bars for his role in brokering kickbacks in the high-profile Lafayette frigate deal in the 1990s. They were all transferred to Taipei Prison in Kueishan, Taoyuan County.”

The generals are going to find life a bit more difficult in their new abode. Sources: Focus Taiwan, “Transfer of military prisoners completed smoothly”.

Oct 12/11: Another lawsuit. In response to a Parliamentary question, Taiwanese Defence Minister Kao Hua-chu says that additional kickbacks have been uncovered, related to supplying parts for the frigates. Taiwan is seeking NT$ 3.0 billion/ $98.4 million in additional compensation from DCNS, above and beyond the sum paid by Thales, for violation of a clause in the May 20/96 Basic Ordering Agreement that prohibited commissions/kickbacks. They are taking the matter to an international court of arbitration, which is also the way the Thales case started. Kao:

“We are confident of winning an arbitration for NT$3 billion in compensation and interest from DCN International (DCNI), France, for its violation of a follow-up contract to provide components and spare parts for the vessels…”

The Defense Ministry has set aside NT$75 million in its 2012 budget plan to fund the new litigation, but Taiwan believes that a victory will also lead to claims for an “arbitration mortgage” and litigation fees, on top of compensation. Agence France Presse | China Post | Focus Taiwan.

June 9/11: The French government and Thales Group announce that they will pay a court-ordered fine of EUR 630 million euros (now about $913 million), after their June 9/11 loss of an appeal against the international court of arbitration ruling (vid. May 3/10 entry). French Defence Minister Gérard Longuet reportedly said that: “At Thales’s demand there will be no higher appeal because frankly this affair is not good publicity.”

The French government, which is on the hook for 72.54% of the fine (EUR 457 million), agreed, but they will require an emergency amendment to their national operating budget. Thales has already set aside provisions for its 27.46% (EUR 173 million) share. Those shares arose because the government has acted as guarantor for 72.5% of the “Bravo” contract with Thomson-CSF. France is also reported to have offered assistance in tracking down and recovering bribe funds, but the question is how much help they can be. As one might imagine, Taiwan’s MND issues statements saying that it was pleased by the ruling. Thales Group || China Post | Focus Taiwan | Radio Taiwan International | Taiwan Today | Agence France Presse | France 24 | Radio France International || Defense News | Reuters India.

Aug 27/10: Jail time. A Taiwanese court sentence former Navy captain Kuo Li-heng to 15 years in jail for accepting $17.6 million in kickbacks from arms dealer Andrew Wang. It won’t matter, because he’s already serving a life sentence for a different bribery case. His brother, Kuo Wen-tien receives a 2-year prison term for helping him launder the money by opening bank accounts in Switzerland.

June 2010: A Taiwanese court clears 6 former navy officials of corruption charges in the frigate deal, on the grounds that there was not enough evidence to prove they made illegal gains. Focus Taiwan | Taiwan News | Agence France Presse via Taipei Times.

May 31/10: The Taiwanese Liberty Times newspaper reports that France will withdraw its military liaison in Taiwan, in response to the successful corruption suit. Winnipeg Free Press.

May 4/10: Taiwan’s Ministry of Justice (MOJ) will put forward an amendment to Article 40 of their Criminal Code, allowing the seizure of any illegally acquired assets of fugitive defendants who have been on the run for more than 6 months. The applications to former Thales agent, and current fugitive from trial, Andrew Wang, are obvious.

Taiwan’s existing confiscation law may only be imposed on convicted persons, and international cooperation in returning the frigate scandal funds depends on a valid legal ruling in Taiwan itself. Focus Taiwan.

May 3/10: An international court of arbitration rules that Thales violated the anti-corruption clause in its 1991 contract to sell frigates to Taiwan. According to Taiwan’s MND, damages are set at an estimated $861 million: about $591 million in bribes, $250 million in interest payments stemming from the case’s long-standing nature, and about $20 million in legal fees. Thales’ statement states EUR 630, or about $830 million, based on “482 million US dollars and 82 million euros, bearing interest as from August 2001; as well as around 15 million euros, bearing interest as from today.”

Since the deal was signed by Thales and the French state-owned shipbuilder DCN, however, Thales is responsible for only 27.463% of that fee, or about $239 million. Since DCNS is a state-owned corporation, the French government would effectively be responsible for the rest. Thales states that it intends to appeal the verdict to the Paris Court of Appeal.

Taiwanese Deputy Defense Minister Chao Shih-chang denies that the MND would accept an offer by the French government to upgrade existing munitions or weaponry in exchange for walking away from the settlement, saying that “Mediated solutions are unacceptable in this case,” which must be concluded according to the letter of the law. Time will tell.

Meanwhile, Taiwan’s State Prosecutor-General Huang Shih-ming said he will ask Swiss authorities to continue to freeze Swiss bank accounts by Andrew Wang. A local task force reportedly set the value of those assets at $700 million in March 2009, down from $900 million before the global financial crisis. Swiss authorities have promised that they will continue to freeze Wang’s funds until Taiwan’s judicial system makes a final judgment. Thales statement | Focus Taiwan | Taiwan News | Taiwan Today | France24 | Business Week | Singapore’s Straits Times.

Aug 6/08: French prosecutors in the Taiwan frigate scandal dismiss the case after 7 years, for “lack of evidence.” The inquiry sought to establish whether French politicians, military officials and other middlemen had illegally profited from the 1991 sale, as it was alleged that substantial parts of this money disappeared into the pockets of various officials.

As noted below, French financial judges Renaud van Ruymbeke and Xavière Simeoni claimed at the end of their initial investigation in 2005 that they had repeatedly been denied access to confidential government defense files which were at the heart of the case. Radio France International

June 13/07: The Swiss Bundeskanzlei (Federal Chancellery) has handed $34 million back to Taiwan as an interim measure – with conditions attached re: legal proceedings against the accused. The remaining assets are still frozen. A decision on their handover will be made by the Federal Examining Magistrate in a second phase in proceedings. Specifically, he must examine whether or not these assets are clearly of criminal origin – in which case they can be handed over to Taiwan without the need for a recovery order – or if their handover should be linked to other conditions under Swiss law. Swiss BK release

May 1/07: The Swiss Federal Office of Justice determined that the guarantee provided in April 2007 by the Taiwanese Minister of Justice was sufficient to fulfill the Federal Examining Magistrate’s conditions. Once this ruling had become legally enforceable, notice could be given on the fixed-term deposits in which the assets were held. Source.

Feb 2/07: A Swiss Federal Examining Magistrate orders the return of $34 million to Taiwan – with the express consent of the 2 account-holders concerned. The reason for this consent may be found in the conditions attached: assurances from the Taiwanese authorities that legal proceedings against the 2 persons in question “would comply with human rights principles.” This is code for assurances that the men would not be executed.

July 21/06: France’s Consultative Commission on National Defense Secrets (CCSDN) not to release documents requested by investigating magistrates Renaud Van Ruymbeke and Xavière Simeoni. Zee News.

Oct 28/05: Taiwanese State Public Prosecutor-General Wu Ying-chao orders the unsealing of Swiss bank files on Thursday related to a high-profile kickback scandal involving Taiwan’s $2.8 billion procurement of 6 Kang Ding Class multi-role semi-stealth frigates. Wu’s directive marked an about-face from his previous announcement that the top-secret files would not be unpacked until after the Dec 3/05 elections; but Swiss authorities have demanded that the Taiwan government come up with a request before mid-December 2005 for the return of the SFR 900 million Lafayette-related slush fund frozen in Swiss banks.

If the Swiss deadline is missed, Wu said, the key suspect in the case, Andrew Wang, would be able to regain access to the fund and destroy all relevant evidence. Wang has been charged in absentia with the murder of naval Captain Yin Ching-feng, corruption, money laundering, and fraud. The Taiwan Government Information Office notes that the files also include a number of previously unexposed overseas bank accounts related to the Lafayette frigate deal, as well as information about relevant capital flow in Switzerland – including deposit times and destinations of the capital. ROC News Agency

Oct 6/05: The Swiss Federal Commission approves the handover of bank files to foreign judicial authorities concerning the controversial sale of French warships to Taiwan, rejecting an appeal by fugitive Taiwanese arms broker Andrew Wang to stop judicial cooperation with Taiwan, France, and Liechtenstein. The 7-member Swiss governing commission says that failing to cooperate is not in Switzerland’s interests.

Aug 26/05: Taiwan’s Premier Frank Hsieh gives “no death penalty” assurances concerning Andrew Wang, as part of conditions set by the Swiss courts on their cooperation.

Jan 30/04: The NY Times reports that the Taiwan frigate deal places the French government at risk of being ordered to repay up to $600 million, according to a confidential report written by French prosecutors and obtained by Le Figaro newspaper.

The anti-corruption clause in the original contract (Article 18) prohibits any commissions, and the contracting party found at fault must reduce the price according to the amount of commissions paid. since the deal was a government-to-government affair, with Thomson-CSF (Thales) holding only the commercial part of the deal, French taxpayers might have to refund to the government of Taiwan the full amount of bribes paid.

March 1/03: France’s former foreign minister, Roland Dumas, tells Le Figaro that France paid $500 million in bribes for the frigate deal. Dumas says that the sum was approved by former president Francois Mitterand, that $400 million was paid to the secretary-general of Taiwan’s ruling KMT party, and $100 million went to the Chinese Communist Party’s Central Committee in Beijing. Taipei Times | Taiwan Panorama.

March 2002: Taiwanese Control Yuan investigators investigating why the military made a U-turn by deciding to purchase the Lafayette frigates, release their report. It found that the price of the frigate deal had been inflated to FF15 billion ($2 billion) from the original quote of FF10 billion, and that Taiwanese politicians and military leaders pocketed $26.75 million in kickbacks from the sale.

Oct 25/2000: Former Taiwanese naval commander-in-chief Yeh Chang-tung, plus Lei Hsueh-ming (in charge of vessels management) and Yao Nung-chung (in charge of weapons procurement) are formally reprimanded over the frigate scandal, in the wake of impeachment documents from Taiwan’s government watchdog agency, the Control Yuan. Another 3 other retired officers, including former premier Hau Pei-tsun, avoid impeachment. Hau had been accused in previous defense kickback scandals as well. BBC News.

Sept 26/2000: Andrew Wang is charged in absentia with Captain Yin Ching-feng’s murder. Taipei Times.

Nov 6/01: Taiwan submits a request for legal assistance from Switzerland in connection with the case, on the grounds that it involved fraud, money laundering and corruption.

May 24/96: The first assembled Lafayette/ Kang Ding Class frigate is delivered to Taiwan. Its anti-air capabilities remain deficient, however, and integration of the frigate’s electronic-combat system remains incomplete.

Dec 20/93: Andrew Wang, the Taiwanese agent for Thomson CSF, leaves Taiwan.

Dec 9/93: Naval Captain Yin Ching-feng disappears. His body is later found floating in the water. Military coroners quickly announced the death as a suicide, but an independent autopsy demanded by his widow points out that his head had been bashed in, and that he had suffered painful wounds while still alive. The Control Yuan later concludes that military investigators had blocked investigators and withheld evidence.

March 1993: Taiwan’s Navy General Headquarters unexpectedly orders local firm China Ship Building Corp (CSBC) to stop assembly work, creating a major financial loss for the company. The Taiwanese and French governments had decided to have the French assemble all 6 frigates instead.

That same month, Yin Ching-feng, head of the navy’s Arms Acquisition Office, visits French authorities, pointing out flaws with the frigates and demanding remedial action.

Feb 1/93: Taiwan signs a $2.8 billion contract for 6 modified Lafayette Class frigates, which are to be assembled in Taiwan by China Ship Building Corp (CSBC). Because of pressure from mainland China, the original contract only provides for the sale of the frigates and their engines, without any arms, surveillance equipment or combat-management systems.

The sale requires overturning France’s policy of not supplying arms to Taiwan, but France’s rising unemployment and competition with the United States smooth over that obstacle.

Additional Readings

• The View from Taiwan (July 18/06) – Lafayette, We Are Still Here. Excellent summary of developments and accusations, with links.

• Taipei Times (Nov 29/05) – Officials were paid to endorse frigate deal, legislator says

• Asia Times (Aug 21/02) – Taiwan frigate scandal refuses to sink

• International Herald Tribune (Jan 24/94) – Taipai Notebook [sic] : The Captain’s Body