Publication: Business Day Issued: Date: 2001-01-10 Reporter: Editor:

Arms Deal Hints at Lack of Safeguards

Publication  Business Day
Date 2001-01-10
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WITH greed being a universal human failing, the arms trade being notoriously crooked and large sums at stake, the question is what safeguards were built into SA's R43bn arms deal to prevent any fingers being dipped into the state's treasure chest. 

Pitifully few, it seems. It has been more than a year since claims surfaced of corruption connected to the deal. A multi-agency government inquiry is cranking up to investigate, and some allegations have already come to light. These have turned the spotlight on individuals and companies that allegedly benefited in an irregular way from the subcontracts signed between overseas defence contractors and local suppliers.

What emerges is that the absence of proper mechanisms to prevent conflicts of interest such as independent monitors and stringently applied regulations was a key weakness of the process used for SA's largest weapons purchase. 

Individuals were only required to declare conflicts of interest voluntarily. From what emerged at hearings of Parliament's public accounts committee last year, it was clear that government conflict-of-interest codes were not adhered to. The committee is likely to seek tighter regulations in this regard when the inquiry is finally over. 

The deal included the acquisition of four German corvettes, three German diesel-electric submarines, 12 British Aerospace fighter trainers, nine Gripen advanced light jet fighters and 30 Italian Agusta light utility  helicopters. In a special report, Auditor-General Shauket Fakie has highlighted the inadequate attention paid by the procurement team to potential conflicts of interest even though interested parties were subjected to a security clearance. "The aspects of independence, fairness and impartiality could have been addressed more significantly," he said. "Material deviations from generally accepted procurement practice were discovered."

Fakie also raised concern about "possible irregularities in contracts awarded to subcontractors", and recommended a forensic audit of these. He also noted the shifting in mid-process of selection criteria for one of the deals. 

The allegations first surfaced when Pan African Congress MP Patricia de Lille told Parliament in late 1999 that she had information alleging African National Congress (ANC) politicians received kickbacks from foreign arms consortiums for promoting their bids.

These unnamed politicians also supposedly benefited from the subcontracting arrangements with SA suppliers by setting up numerous front companies. Prices were said to have been loaded to take account of these extra costs while other unspecified parties stood to benefit improperly from the multibillion-rand offset proposals. 

To date, media reports have focused on conflict-of-interest and self-enrichment allegations involving former defence minister Joe Modise and the head of the defence department's arms procurement committee, Shamin "Chippy" Shaik. It is alleged that companies linked to Shaik were the main beneficiaries of the local contracts. 

De Lille's sources also accused ANC MP Tony Yengeni of having received money for a new Mercedes from one of the bidders, an allegation he strenuously denies. Shortly after leaving the cabinet in 1999, Modise became chairman and major shareholder of Conlog, which has a significant stake in the armaments package. 

Noseweek magazine claims Modise bought his shares in Conlog with R40m borrowed from a German friend, who routed the money via Mozambique and an account of Kingsgate Clothing in Durban, which is controlled by a Mrs Shaik.

Critical in these alleged conflicts of interest, according to Noseweek, was the role of African Defence Systems (ADS), a company mandated by the defence secretariat to provide SA partners for the foreign suppliers, integrate the projects and co-ordinate the purchase of corvettes for the navy. 

The involvement of SA defence companies in the fulfilment of the contracts was considered a crucial element from which they stood to benefit by billions of rands.

ADS's involvement raises many questions. How could a single private sector firm play such a powerful role in the arrangements for a state contract? How was this company chosen to perform this function? Did anyone know about the alleged involvement of Shaik family members? If so, who? How was the company able to promote itself and its subsidiaries in contracts when one of the conditions of its role as facilitator should have been that it remain strictly impartial in the selection process?

ADS lists Shaik's brother, Shabir, as a director. His wife, Zarina, works as a marketing executive for the company. More recently, retired SA National Defence Force general Lambert Moloi and his son-in-law, engineer Tshepo Molai, have also become directors. 

According to newspaper reports, Moloi is Modise's brother-inlaw and Molai's father-in-law. Moloi and Molai are also directors of Futuristic Business Solutions (FBS), another company that has featured in the corruption allegations. 

FBS, which has long-standing links with ADS and has become a 20% shareholder in the company, has been awarded about 70 subcontracts, although newspaper reports claim that it lacked infrastructure and expertise. The Mail & Guardian newspaper suggests that FBS's procurement contracts put it in line to earn about R750m from the contracts and that it stands to handle nearly R1bn in defence logistics over the next five years.

The balance of ADS's equity is owned by a French military firm, Thomson-CSF, part of a consortium that won the contract to supply control systems for the corvette deal. At the time, Thomson was the sole shareholder in ADS. FBS has recently merged with Conlog's parent company, Logtek, to form Applied Logistics Engineering (ALE), which will take over the procurement contracts awarded to FBS.

ALE's chairman is Armscor director and former Umkhonto we Sizwe commissar Keith Mokoape. Armscor was also involved with ADS in identifying SA contractors. Mokoape insists that he recused himself from Armscor's decisions regarding Logtek and did not participate in meetings where conflicts of interest could have arisen.

According to newspaper reports, several foreign bidders have alleged that both Shaik and ADS insisted that either ADS and FBS, or both, be brought in as SA subcontractors if their bids were to succeed. Both companies allegedly demanded the payment of administration and management fees running into hundreds of thousands of dollars to tie up deals and administer them. 

One case cited is that of USbased Bell Helicopter, which claimed it was assured it would get the helicopter contract if a satisfactory arrangement was made with FBS. It says it refused and was passed over in favour of Italian manufacturer, Agusta, whose helicopters allegedly cost R3m more. Bell suggests the contract was awarded without the normal tests to determine whether the aircraft were suited to SA conditions.

FBS, which had not previously been part of the Agusta package, was included as a partner in the contract secured by Agusta. Questions have also arisen about the role of ADS and FBS in the purchase of corvettes. A local manufacturer, CCII, identified by the navy as the preferred supplier of the information management system for the vessels, was allegedly dropped by ADS in favour of a consortium that included Detexis, a subsidiary of ADS's parent company, Thomson. In his report, Fakie recommended that a forensic audit be conducted into this deal. Chippy Shaik said in an interview that CCII had been passed over because its system was "new technology" for which it was unwilling to provide performance guarantees.

Shaik insists that he recused himself from all decisions on the involvement of SA companies in the weapons deals on the basis of conflict of interest. One might ask, however, why the head of an acquisition team would feel the need to exclude himself from such a wide area of the project. In other words, should Shaik have been given the job in the first place? 

At the time of the parliamentary hearing on Fakie's report, committee members expressed shock that there were no in-built procedures requiring those involved in finalising the deal to declare conflicts of interest. This is mandatory for all government departments and parastatals. Shaik conceded this was a major flaw in the process. 

If the allegations prove to be true, the question is: how was it allowed to happen? 

With acknowledgement to Business Day.