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BAE’s Bribery Battles: Weakened Post-Settlement Investigations Drag On

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BAE’s Hawk:over the top(click to view full) The UK’s Serious Fraud Office (SFO) spent 6 years chasing BAE Systems, over allegations that bribes were paid to secure foreign deals in a number of countries. Bribes are the least of the allegations involved in some international defense deals, and contract wins without inducements would be far […]
Hawk LIFT Over Top

BAE’s Hawk:
over the top
(click to view full)

The UK’s Serious Fraud Office (SFO) spent 6 years chasing BAE Systems, over allegations that bribes were paid to secure foreign deals in a number of countries. Bribes are the least of the allegations involved in some international defense deals, and contract wins without inducements would be far more surprising in countries like Saudi Arabia, Tanzania, and South Africa. Nevertheless, the UK does have laws to prevent British firms from paying them.

An SFO investigation into the giant Saudi Al-Yamamah aircraft deal was killed in December 2006 on national security grounds, after the Saudis threatened to cut off anti-terrorism cooperation and intelligence sharing. The government’s decision was upheld by the British House of Lords, but the SFO continued to pursue other reports concerning Chile, the Czech Republic, Romania, South Africa, Tanzania, and Qatar. The US Department of Justice, meanwhile, never let go of the Saudi deal.

In 2010 a settlement was reached that included the SFO – and the US DoJ, which got the lion’s share. A held-up deal with Tanzania then settled in early 2012. By 2013 this left an “investigation” in South Africa, and a Czech case with little apparent progress.

Deals, Plea Bargains & Options

Regina Maria

Romania’s Regina Maria
(click to view full)

The Qatari and Chilean SFO investigations were dropped in 2008, and a Romanian deal to refurbish 2 ex-Royal Navy Type 22 frigates is no longer under investigation either. Payments in 2011 and 2012 took care of Tanzania. That leaves South Africa and the Czech Republic as open investigations.

The South African deal for Gripen fighters and Hawk advanced trainer aircraft was completed in the context of BAE’s contractual role in marketing Saab’s Gripen internationally. The GBP 1.6 billion deal involved 28 JAS-39C/D fighters and 24 Hawk trainers. Persistent allegations place the ultimate recipient and director of up to GBP 115 million in bribes as high as current President Jacob Zuma.

The 1st Tanzanian deal involved air traffic control radars, and was reportedly worth GBP 28 million. BAE was fined GBP 500,000 in 2010 for concealing payments of $12.4m to “marketing adviser” Sailesh Vithlani, and the UK SFO pushed BAE to make a restitution payment to the Tanzanian people, equal to the GBP 28 million size of the contract.

The Czech situation is also related to BAE’s contractual role in marketing Saab’s Gripen fighter internationally, but the GBP 1.1 billion purchase deal was never concluded. Instead, the Czech Republic leased 14 of the fighters from the government of Sweden.

JAS-39s & Cheetahs

Swedish JAS-39s
and SAAF Cheetahs
(click to view full)

As BAE and the SFO considered their positions, several options were on the table.

One was full contestation, involving charges and trial. That route could be appealing to a company that says it hasn’t violated any laws, but any trial would take time, during which it would soak up vast executive effort and serve as negative publicity. On the other side of the table, a loss for the SFO would mark the complete failure of all SFO investigations into BAE Systems – and raise sharp questions about why they were pursued.

Another option, which SFO director Richard Alderman is reportedly inviting, was ‘deferred prosecution’. BAE would plead guilty, pay a fine imposed by a judge, and agree to independent monitoring of its behavior. Future violations would allow the imposition of penalties per the original charges, without creating “double jeopardy”. The approach is similar to a criminal suspended sentence, but it’s a novel approach for British corporate cases.

The problem with deferred prosecution is that both US and EU rules could be interpreted to ban any company from bidding for public contracts for specified periods, if they are found guilty of bribery. With the US Department of Justice still technically pursuing their own investigation into the Saudi contracts, for reasons variously attributed as prosecutorial zeal, or punishment for a major sales loss by American firms, this option was not attractive to BAE. Particularly given the scale of BAE Systems’ American contracts that could be placed at risk, and the fact that the Americans seem unlikely to get very far unless BAE hands them a guilty plea.

Media reports in The Times and elsewhere noted that other options may also exist. One would involve a deal whereby the SFO cites BAE for mere procedural failings or accounting procedures, such as the tax treatment of “commissions” paid to middlemen. These approaches would sidestep more serious charges of corruption or bribery, allow the imposition of fines to create a win for the SFO, and put the case behind BAE without requiring an admission of guilt.

As legal observers are well aware, settlements on the eve of trial, or even during proceedings, are not uncommon. All of these options still existed, until and unless a verdict is rendered.

In February 2010, a settlement was reached with the UK and US Department of Justice. That led to another set of negotiations with the US State Department, who saw an opportunity of their own. That was settled in May 2010, taking all major cases off the table, but not quite all investigations.

Events & Developments

BAE logo

Jan 17/13: South Africa. The local media report about a leaked resignation letter from Norman Moabi, a lawyer and former judge who was an investigator for the Arms Procurement commission set up in the fall 2011. Moabi allegedly lost confidence that the commission is operating in good faith and without outside interference. News24 | Beeld [in Afrikaans].

The commission is chaired by judge Seriti from the Supreme Court of Appeal, who said its work could take 3 years. Its first public hearings are scheduled for March-May 2013. The commission had a rough start, as judges Yvonne Mokgoro was replaced, and Justice Willem van der Merwe withdrew his name, just after the commission was first set up – in both cases for unclear reasons. Then in May 2012 Mvuseni Ngubane, the commission’s secretary at the time, was found dead in his car with a bullet in the head and a suicide note next to his body.

Jan 17/13: Austria. Alfons Mensdorff-Pouilly was no longer threatened by inquiries in the UK, but still under trial in Austria. A court in Vienna found him not guilty of money laundering, but sentenced him to two months of suspended jail for evidence falsification. The judge was obviously frustrated as he clearly saw smoke, but not enough fire to back up a conviction. | SAPA | Financial Times | Austria Presse Agentur (in German).

Jan-June 2012: Czech Republic. Allegations that the Czechs’ government’s original deal to buy 24 JAS-39 fighters may have been marred by corruption creates uncertainty over renewal of the lesser 14-plane lease-to-buy deal that was signed in 2004. The current OSD party government is reportedly very cool to the idea, and Czech Prime Minister Petr Necas said in June 2011 that it would be “difficult to imagine” renewing the contract until the corruption investigation was concluded. None of this affects BAE directly, who has dissolved its global marketing partnership with Saab.

The government eventually agrees to pursue a 5-year lease extension, but it isn’t dropping the corruption investigation against its predecessor government. That could eventually affect BAE, which has remained untouched by this case so far.

In January the Czech authorities are sending an investigator to meet with Gunnar Stetler, the chief prosecutor in Sweden’s anti-corruption unit (Czech Position | Radio Sweden.) But in June 2012 the Supreme Administrative Court stated that Prague High Prosecutor Vlastimil Rampula had hampered the Gripen case because of a mix of insubordination and inaction. That decision confirms Rampula’s sacking.

March 15/12: Tanzania. BAE pays GBP 29.5 million (about $47 million) plus accrued interest to provide textbooks and teacher guides to Tanzania’s primary schools, under a Memorandum of Understanding signed by the Tanzanian government, BAE and the UK’s Serious Fraud Office (SFO). The deal completes an earlier agreement (vid. Dec 21/10) to directly benefit the Tanzanian people, at around the full value of the air traffic control radar contract. UK SFO | The Guardian.

Nov 30/11: Tanzania. A report to the International Development Committee of the House of Commons shows the SFO’s concerns relative to how much BAE should pay, when that payment would finally happen, and whether the money would be used effectively for development purposes.

Sept 15/11: South Africa South Africa is to reopen its investigation of past deals with BAE and Saab. A commission of inquiry should be set up for that purpose but few details are known. Given that the commission will be implicitly investigating the highest levels of South Africa’s current government, cynicism is warranted.

Sept 09/11: Tanzania. After being criticized for delays in making the agreed payment to Tanzania (vid. Dec 21/10), BAE agrees to make the GBP 29.5 million payment immediately, through the UK government’s Department for International Development. BAE CEO Dick Olver:

“I have now written again to the secretary of state, indicating our readiness to remit a Banker’s Draft payable to the Government of Tanzania. We are ready to do that as soon as DFID indicate their agreement.”

See: Defence Management | The Guardian.

May 17/11: USA. It’s never quite over when governments are involved. BAE announces another $69-79 million chunk exacted by the US State Department:

“The Company and the U.S. Department of State have reached a civil settlement in connection with violations of the US defence export control regulations that were the subject of the company’s earlier settlement with the United States Justice Department, announced by the Company on 5th February 2010… will pay a fine of up to $79m in respect of alleged civil violations… payable over a period of three years, subject to a reduction of up to $10m in respect of the cost of enhanced export control compliance measures already implemented by the company and planned for implementation during the four-year period. In addition, a limited number of the company’s UK-originated export programmes will be subjected to enhanced administrative review, which is not expected to adversely impact the company’s current or future export programmes. The Company will also make additional commitments concerning its ongoing compliance.”

Dec 21/10: Tanzania. BAE Systems Plc is fined GBP 500,000 by a Crown Court, after admitting it had “failed to keep adequate accounting records” in relation to the Tanzanian air traffic control system contract. What BAE actually did was steer payments to a “covert marketing advisor,” via offshore companies set up for this purpose.

This outcome follows the global SFO settlement by BAE, where the firm agreed to an ex-gratia payment for the benefit of the people of Tanzania of GBP 30 million, less any fine imposed by the Crown Court. Which is now set at GBP 500,000. In this case, BAE was also ordered to pay GBP 225,000 costs to the SFO, to recompense them for prosecution fees. Those costs do not come out of their required payment to Tanzania. UK SFO | The Guardian.

Feb 5/10: BAE Systems settles with USA and UK. The settlement is worth about $450 million – but most of it goes to the USA.

Under the agreement with the British Serious Fraud Office, BAE takes the procedural fault option, and pays less than 1/10th of the SFO’s original request. The firm will plead guilty to 1 charge of breach of duty to keep accounting records, and pay an agreed penalty of GBP 30 million. Some of that will be a fine to be determined by a Court, with any balance paid as a charitable payment for the benefit of Tanzania. BAE Chairman Dick Olver’s official statement says that:

“In connection with the sale of a radar system by the Company to Tanzania in 1999, the Company made commission payments to a marketing adviser and failed to accurately record such payments in its accounting records. The Company failed to scrutinise these records adequately to ensure that they were reasonably accurate and permitted them to remain uncorrected. The Company very much regrets and accepts full responsibility for these past shortcomings.”

The same approach was taken with respect to the US Department of Justice. BAE will plead guilty to 1 charge of conspiring to make false statements to the U.S. Government in connection with certain regulatory filings and undertakings. The Company will pay a fine of $400 million and make additional commitments concerning its ongoing compliance. The agreement requires court approval. Chairman Dick Olver:

“In 2000, the Company gave a commitment to the U.S. Government that it would establish and comply with defined U.S. regulatory requirements within a certain period and it subsequently failed to honour this commitment or to disclose its shortcomings.”

UK SFO release | UK SFO Director’s Statement podcast [Windows Media] | BAE Systems | BBC News [incl. video] | BBC: Lord Goldsmith defends the deal [incl. video] | Blackpool Gazette | Daily Mail | Edinburgh Evening News | The Guardian: Perseverance and bluff – how the legal deal was done | The Guardian re: the Tanzania deal | Hampshire News & Mail | The Independent | London Telegraph | Bloomberg | Washington Post | Jane’s.


Feb 5/10: As part of the settlement with BAE Systems, the UK SFO withdraws its charges against Count Alfons Mensdorff-Pouilly. UK SFO.

Jan 29/10: Former BAE Systems Plc agent and Austrian count Alfons Mensdorff-Pouilly has been charged by Britain’s Serious Fraud Office (SFO), with paying off unknown officials of the Czech Republic, Hungary and Austria to secure, or reward, contracts for the supply of JAS-39 Gripen fighter jets between 2002-2008 inclusive. The SFO alleges that Mensdorff-Pouilly assisted BAE in funneling $17 million/ GBP 10.8 million into 3 offshore companies with Swiss bank accounts.

Mensdorff-Pouilly’s lawyer Harald Schuster said his client rejected the charges, and he was released on GBP 1 million bail. BAE cannot comment now that charges have been laid. UK SFO statement | London Telegraph | Bloomberg | NY Times.

Oct 1/09: SFO director Richard Alderman says the SFO will prosecute BAE, subject to the consent of Britain’s Attorney General. Reports indicate that BAE Systems rejected the SFO’s proposal of a GBP 300 million settlement, which they apparently considered excessive by an order of magnitude. They also say claim that BAE’s Board of Directors received legal advice that settlement on these terms could leave the firm open to civil lawsuits for misuse of shareholders’ funds.

BAE Systems are reportedly still willing to consider a deal on terms they find acceptable. There are also reports that BAE Systems is fishing to see how hard the evidence is, before making a final decision. That would happen during the trial’s discovery phase anyway, but it may happen earlier if both sides are willing to deal. The firm’s official release says that BAE:

“…continues to expend considerable effort seeking to resolve, at the earliest opportunity, the historical matters under investigation by the SFO… If the Director of the SFO obtains the consent that he seeks from the Attorney General and proceedings are commenced, the Company will deal with any issues raised in those proceedings at the appropriate time and, if necessary, in court.”

As a final complicating factor, the US Department of Justice is reportedly asking the Serious Fraud Office to share the information it has compiled, outside of the public record created by a trial process. There has reportedly been an informal exchange of information, and an official request for details is expected soon. Accepting this invitation could get the SFO in serious political trouble, however, if it’s perceived in Whitehall as abetting American protectionism against a British firm. SFO announcement | BAE official response | UK’s Daily Mail | Guardian | Financial Advice | Independent | Telegraph | Times | Times re: settlement readiness | Sunday Times opinion | Agence France Presse | Bloomberg | Reuters | The Daily Mail points out that SFO has a spotty record of both failed and missed prosecutions.

Sept 21/09: South Africa. Terry Crawford-Browne of Cape Town’s Business Daily writes that:

“Affidavits in my possession detail how BAE paid those bribes of [GBP] 115m (R1,5bn), to whom and into which bank accounts… The BAE supply contracts also in my possession give the state the right to cancel the contracts and even to claim compensation. With Finance Minister Pravin Gordhan facing a fiscal deficit estimated at between R60bn and R200bn, cancelling the BAE contracts should be his first option…”

Sept 4-7/09: Some reports say that BAE has been given one month to agree a deal or face prosecution, but other newspapers like the Blackpool Gazette quote “sources close to the company” who have insisted that there is no deadline and no imminent resolution, adding BAE Systems’ position that it broke no laws at the time the arms sales were done.

The firm could be subject to “tens of millions” of pounds in fines if convicted or if it pleads guilty, since the fines relate to the total or potential value of the contracts, rather than the scale of the alleged payments. Blackpool Gazette | Daily Mail | The Times | Reuters re: potential settlement | The Times re: potential settlement.

Sept 2/09: Romania. Britain’s Serious Fraud Office has stopped investigations into potential overcharging and commissions paid during the sale and refurbishment of 2 British Type 22 frigates: The Regele Ferdinand (formerly HMS Coventry) and Regina Maria (Formerly HMS London). Romania’s Anticorruption Department (DNA) had ended its own investigation in June 2009, and both investigations will remain closed unless fresh evidence emerges. Romanian Times | UK Daily Mail.

Additional Readings

* Ersnt & Young – UK Bribery Digest (Jan. 2012) [PDF]

* Profil – Graf Ali und das Millionenrad – A profile in German of Alfons “Count Ali” Mensdorff-Pouilly by an Austrian weekly.

* Daily Mail (Sept 5/09) – The courteous SFO sheriff with BAE in his sights.

* Aviation Week (March 28/08) – South African Air Force To Receive First Gripen Soon. Lays out the deals.

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