ARMS TRADE CORRUPTION AND POLITICAL FINANCE xiaodon liang and sam perlo-freeman

July 9, 2018

INTRODUCTION The World Peace Foundation, an operating foundation affiliated Talk of corruption in the global arms business conjures up solely with the Fletcher School salacious images of personal enrichment. But arms deals at Tufts University, aims to produce profits for multiple purposes, not least of which isto provide intellectual leadership keep a political machine running. Greed as a motive for graft on issues of peace, justice captures headlines more readily than ambition – if for no and security. We believe that other reason that it is more relatable. Nonetheless, a failure innovative research and teaching to appreciate the importance of corruption in creating and are critical to the challenges of maintaining political power can in turn lead to underestimating making peace around the world, the impact of corruption within political systems. and should go hand-in-hand with advocacy and practical engagement with the toughest This occasional paper examines the link between political issues. To respond to organized finance and corruption in the arms trade. It draws on the World violence today, we not only need Peace Foundation’s Compendium of Arms Trade Corruption, a new instruments and tools—we collection of 29 cases of corruption in the arms trade and the need a new vision of peace. Our broader military sector from around the world, each containing challenge is to reinvent peace. a standard set of summary information along with a narrative description.1 The arms trade has many features that make it highly susceptible to corruption.2 This paper makes the case that it also has four key features that tie it particularly closely to political competition and political finance. First, the arms trade can involve extremely large contracts from which corrupt politicians, even with only light skimming, can obtain a large absolute sum of funding for political finance. Second, the secrecy and sensitivity of decision-making on arms trade

1 World Peace Foundation, “A Compendium of Arms Trade Cor- ruption,” website, last updated Apr. 10, 2018, https://sites.tufts.edu/ corruptarmsdeals. 2 See for example Paul Holden, ed., Indefensible: seven myths that sustain the global arms trade (: Zed Books, 2017). ARMS TRADE CORRUPTION AND POLITICAL FINANCE policies and the complexity — real or artificial in democracies as well, but payments to political — of the technical arrangements of a deal parties or election campaign funds are more likely provide opportunities to mask embezzlement, to be identifiable, and detailed investigations of kickbacks, tender manipulation, or other forms corruption are more possible in the first place. of corruption. Third, in countries where access to arms is itself an integral component of The cases—which include scandals from political power, the success of an arms deal can Austria, Belgium, , Germany, , and itself be a political factor. Most importantly, —nonetheless show a considerable international arms deals are intrinsically degree of variety in terms of the recipients connected to political power in both exporter of the bribes, the purposes of the bribes, and and importer countries, giving politicians a the network of political relationships that direct role in decision-making, which can be determine the distribution of bribes. While leveraged to obtain corrupt political benefits. this research draws on a limited number of case study examples, it will introduce For the purposes of this paper, the term patterns that are distinct to each variation, ‘political expenditure’ refers to all spending by as well as some of the key common factors. political actors (individuals and organizations) made with a goal of achieving, maintaining, Section 1 discusses the nature of political or increasing political power and influence. finance corruption, the motivations for it, It includes formal expenditure: all spending and its relationship to developments in for election campaigns (general, primary, and political competition and governance in intra-party), and all other legitimate activity western democracies in particular. Section 2 by political parties and organizations that considers the links between the arms trade and pursue electoral goals (e.g. the payment of political finance, and why the arms business is salaries). It also includes informal expenditure, particularly suited to political finance corruption. which may include patronage payments, vote- Section 3 discusses some of the dimensions by buying, payments for favorable media coverage, which the cases of political finance corruption spending on armed groups to target political covered by the Compendium can be classified, opponents, and other illicit activities. In turn, and gives a summary list of the Compendium ‘political finance’ (or political funding) refers to cases, and their linkages (if any) to political the sources of funding for political expenditure, finance. Sections 4 and 5 discuss a number and activities conducted in seeking such funding. of these cases in detail: Section 4 focuses on ‘traditional’ of decision-makers Although the framework presented in this study in recipient countries in arms deals, while could be applied to any type of state, in practice Section 5 looks at the perhaps rather more the analysis and case studies draw primarily surprising phenomenon of ‘retro-commissions’, from democracies. This is due primarily to the where bribes are also paid to political actors in availability of information. If a large bribe is paid the supplier countries. Section 6 concludes. to a leading politician in an authoritarian regime, it is entirely possible that a significant portion of this may be used for political purposes, such as patronage networks or recruitment of violent vote-brokers, but this will be difficult to trace. The boundary between a leader’s personal and political funds is in any case likely to be vague, if it exists at all. Such vagueness can certainly apply

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1.UNDERSTANDING or the threat thereof, the costs of paying for CORRUPTION IN local enforcers and security may be significant. POLITICAL FINANCE In any type of polity, then, obtaining sufficient The Problem of Political sources of political finance is a key challenge Finance for any serious political actor. A decade ago, the British minister Jack Straw described the Politics is an expensive business. U.S. presidential dynamic of the increasing cost of political election campaigns can cost hundreds of millions campaigning as nothing less than an “arms race.”4 of dollars,3 and even local campaigns for minor elected offices or leadership positions within a In many democracies—and in some authoritarian political party can stretch individual budgets. systems with controlled competition as well— During the electoral off-season, maintaining the political finance is regulated and subject to running of an effective political machine can also transparency requirements. Table 1 below, be costly; youth programs, party newspapers, summarizes data from the Political Finance conferences, and foundations all require funding. Database, maintained by the Institute for Beyond clear-cut legitimate activities, we find the Democracy and Electoral Assistance (IDEA), murkier world of political patronage, whereby on the number of countries that have political leaders maintain and strengthen a adopted particular categories of regulations.5 network of allies and supporters within TABLE 1: SUMMARY OF WORLDWIDE CAMPAIGN FINANCE REGULATIONS their party, and in the Regulation Number of Countries political establishment more broadly. This can Reveal donor identities 76 (yes), 48 (sometimes) also be entirely legal, Reports to be made public 110 (yes), 1 (sometimes) through efforts such as Limits on donations 63 (natural entities, legal, or both) promoting local youth Public Funding of Parties 119 (regular, campaign, or both) leadership, or it can Party Candidate involve illegal methods, Ban on corporate donations 46 39 such as illicit payments Caps on spending 54 81 or preferential Reporting of Finances 128 110 treatment in tenders. Local leaders and The most common requirements are for the influencers, able to mobilize a community’s votes, benefit of transparency: letting voters know who can demand substantial payments. Blackmailers is contributing to a political party or candidate, such as a candidate’s former business and sexual and reporting how the funds are used. In a partners may require discreet payoffs. At the murkiest end of the spectrum are activities such 4 Hélène Mulholland, “Pressure Groups could Ex- as vote buying, prevalent in weaker democracies, ploit party funding limits, warns Straw,” The Guard- but far from unknown in Western Europe. Where ian (online), Sep. 5, 2006, https://www.theguardian. politics is routinely accompanied by violence com/politics/2006/sep/05/partyfunding.uk. 5 International Institute for Democracy and 3 U.S. Federal Election Commission, “Campaign Electoral Assistance, “Political Finance Database,” Finance Data, Spending Breakdown,” website, n.d., website, n.d., https://www.idea.int/data-tools/data/ https://www.fec.gov/data/spending. political-finance-database.

Page 3 ARMS TRADE CORRUPTION AND POLITICAL FINANCE smaller set of countries, there also exist various What are the negative consequences of limitations on the scale of political finance, political finance-related corruption? Mark such as caps on donations or total spending by Philp offers several alternative answers: parties or candidates. Further, some political tilts the playing field systems also bar donations by corporations against particular interest groups; it loosens and other interest groups. In a majority of the constraints on limited government; and 178 countries in the IDEA database, the state it inhibits the body politic from creating a provides at least some direct funding of political public consensus on challenges and threats.7 parties, whether during elections only or on an Expanding on the first perspective, Mark Warren ongoing basis. Similarly, in 124 countries there suggests understanding political corruption as exist provisions for subsidized media access. “duplicitous exclusion,” whereby citizens are unjustly excluded from a political process which Given the number of political systems that have they have a right to participate in.8 Exclusion, requirements to account for both the origins of in turn, could breed distrust of democracy. funds and their disposition, it is unsurprising Thus, politically-motivated corruption cannot that an entirely off-budget source of campaign be justified as unselfish acts which promote financing such as kickbacks from the arms trade a subjectively perceived collective good. would be popular. Secret funds remain important to building political networks in part because The economic consequences of political intra-party competition is seldom supported corruption are similar to those imposed by by state contributions, and also because corruption for any other motive. The primary most legitimate donors would prefer funding difference, however, is that corruption in the general elections, not internal competition. political process can become as ingrained and constant a part of the national economic system In discussing political corruption, we can consider as demanded by the election cycle, whereas two types of issues: first, corruption in the process corruption for private purposes may be more of securing political finance, which is the primary opportunistic. In summarizing their conclusions link between arms trade corruption and political from the early-1990s Tangentopoli corruption finance; and second, corruption in the conduct of scandal in , Donatella Della Porta and political activity, such as vote buying, or providing Alberto Vannucci identified increasing public bribes, political donations, or other benefits procurement costs and declining efficiency in in return for political support. In many cases, government contractors as likely results of a corrupt sources of political finance may also be bribery-reliant political system. As businesses linked to efforts to circumvent electoral funding increasingly specialized in bribery and lobbying, regulations. Ironically, therefore, countries with they squeezed out more efficient competitors much looser campaign finance regulations, such as the , may experience less illegal political corruption, although many of 7 Mark Philp, “Defining Political Corruption,” the practices of U.S. political finance, such as Political Studies, Vol. 45, No. 3 (Aug. 1997), pp. 453- large corporate campaign contributions to key 456. legislators, might well be considered a form 8 Mark E. Warren, “What Does Corruption Mean 6 of legal corruption (or ‘influence markets’ ). in a Democracy?” American Journal of Political Science, Vol. 48, No. 2 (Apr. 2004), pp. 328–343; 6 Michael Johnston, Syndromes of Corruption: Mark E. Warren, “Political Corruption as Duplicitous Wealth, Power, and Democracy (Cambridge: Cam- Exclusion,” PS: Political Science and Politics, Vol. 39, bridge University Press, 2005). No. 4 (Oct. 2006), pp. 803-807.

Page 4 ARMS TRADE CORRUPTION AND POLITICAL FINANCE offering lower costs.9 Despite deep distrust end of the Cold War and consequent disruptions in government, the Italian patronage system in streams of political funding, younger kept electoral participation rates at high levels. developing democracies—and autocracies— also turned toward new and diverse forms of corruption to fund their political systems.12 The Causes and Modes of end of the Cold War may also have contributed Corruption in Political to a more relaxed ideological environment in Finance which the dirty laundry of the centrist parties of Western Europe could finally be aired.13 Political scientists’ understanding of the drivers and modes of corruption in political Peter Mair, “The Cartel Party Thesis: A Restatement,” finance has evolved with their understanding Perspectives on Politics, Vol. 7, No. 4 (Dec. 2009), of political parties as institutions in national pp. 753-766; Jonathan Hopkin, “Political Parties, political systems. Many observers describe a Political Corruption, and the Economic Theory of De- trend in the second half of the 20th Century mocracy,” Crime, Law & Social Change, Vol. 27, No. away from mass parties representing distinct 3 (May 1997), pp. 255-274; Jonathan Hopkin, “The ideological and economic cleavages, towards Problem with Party Finance Theoretical Perspectives professionalized parties seeking to win the on the Funding of Party Politics,” Party Politics, Vol. largest number of voters as possible, as part of a 10, No. 6 (Nov. 2004), pp. 627–651; Robert Williams, “catch-all” strategy. With this came a shift from “Aspects of Party Finance and Political Corruption,” “labor-intensive” mass campaigns to capital- in Robert Williams, ed., Party Finance and Politi- intensive modes of campaigning.10 In the 1990s, cal Corruption (Basingstoke: Palgrave Macmillan, the explosion of political financing scandals 2000), pp. 1-13; Michael Pinto-Duschinsky, “Financ- in France, Germany, and Italy, raised the ing Politics: A Global View,” Journal of Democracy, question of whether certain innovations in party Vol. 13, No. 4 (Oct. 2002), pp. 69-86; Matthew C. Ste- finance were more conducive to corruption in phenson, “Corruption and Democratic Institutions: A established democracies.11 Meanwhile, with the Review and Synthesis,” in Susan Rose-Ackerman and 9 Donatella Della Porta and Alberto Vannucci. “The Paul Lagunes, eds., Greed, Corruption, and the Mod- Perverse Effects of Political Corruption,” Political ern State: Essays in Political Economy (Cheltenham: Studies, Vol. 45, No. 3 (Aug. 1997), pp. 522-529. Edward Elgar, 2015), pp. 92-133; Jana Kunicová and 10 See e.g. Alessandro Pizzorno, “Interests and Par- Susan Rose-Ackerman, “Electoral Rules and Consti- ties in Pluralism,” in Suzanne Berger, ed., Organising tutional Structures as Constraints on Corruption,” Interests in Western Europe (Cambridge: University British Journal of Political Science, Vol. 35, No. 4 Press, 1981), p. 272; Otto Kirchheimer, “The Trans- (Oct. 2005), pp. 573-606. formation of Western European Party Systems,” in J. 12 Alex de Waal, The Real Politics of the Horn LaPalombara and M. Weiner, eds., Political Parties of Africa: Money, War, and the Business of Power and Political Development (Princeton: University (Cambridge: Polity Press, 2015), pp. 51-56; Robert Press, 1966), pp. 177-200; and Angelo Panebianco, H. Bates, When Things Fell Apart: State Failure in Political Parties: Organisation and Power (Cam- Late-Century Africa (Cambridge: Cambridge Univer- bridge: University Press, 1988). sity Press, 2008). 11 Richard S. Katz and Peter Mair, “Changing Mod- 13 James Newell, “Party Finance and Corruption: els of Party Organization and Party Democracy: The Italy,” in Robert Williams, ed., Party Finance and Emergence of the Cartel Party,” Party Politics, Vol. Political Corruption (Basingstoke: Palgrave Macmil- 1, No. 1 (Jan. 1995), pp. 5-28; Richard S. Katz and lan, 2000), p. 62.

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Political parties adopted several alternative to seek illegal funds. Scholars remain divided strategies to adapt to the disappearance of on both these issues. While Michael Pinto- membership fees and, on the left, trade union Duschinsky, in a broad review of the debate, membership dues as primary sources of funding.14 argues that public subsidies have not decreased First, the political system could be organized to corruption, a narrower analysis of Eastern reward both in-kind political work and financial European states by Tatiana Kostadinova contributions with control of ministries or lower suggests that it has.17 Further, political parties positions. Second, parties could put their policies have typically spent as much as they can up for sale to the highest bidder – legally in the bring in, and spending has little connection United States and illegally in Italy and Spain with how much is provided by the state.18 through public procurement corruption. Third, While a good part of the debate about the link political parties could seek out or be created by between corruption and political finance has a single wealthy individual, with party policy focused on inter-party competition, there is geared toward rewarding the benefactor’s also a link to the management of politics within material interests. The paradigmatic example is political parties. In a number of cases described ’s Forza Italia. Finally, parties in this paper, corruption is motivated by intra- could to fund themselves through state party rivalry. Party leaders have strong incentives contributions. According to IDEA, presently to supplement intra-party patronage—normally 119 countries around the world provide at least associated more with in-kind favors and the some public funding to political parties, whether creation of rival networks—with more direct only during campaigns or permanently.15 inducements, such as cash for primary campaigns. Public funding of political parties has led some Off-budget political funds have a long history; in authors, such as Richard Katz and Peter Mair, to hypothesize that larger political parties were 17 Pinto-Duschinsky, “Financing Politics: A Global acting to create cartel-like conditions to edge out View,” pp. 78-79; Tatiana Kostadinova, Political smaller competitors and preserve their political Corruption in Eastern Europe: Politics after Com- 16 fortunes despite defeat at the ballot box. munism (Boulder: Lynne Rienner, 2012), pp. 83-84. With the shift toward more professionalized Pinto-Duschinsky argues that public perceptions of and capital-intensive campaigning, observers increasing campaign costs may be exaggerated as began questioning whether the increased they overlook the historical expansion of the elector- demand for cash had become an incentive for ate, the growing importance of high-visibility national illegal contributions and political corruption. campaigns in parallel with the declining visibility of A subsidiary question also arose: whether local campaigning, and the hidden costs of organizing state funding could attenuate the incentives traditional labor-intensive campaigns; he draws on Stephen Ansolabehere, Alan Gerber, and James M. 14 These four as classified in Hopkin, “The Problem Snyder, Jr., ‘Corruption and the Growth of Campaign with Party Finance Theoretical Perspectives on the Spending,’ in Gerald C. Lubenow, ed., A User’s Guide Funding of Party Politics,” pp. 631-636. to Campaign Finance Reform (Lanham: Rowman & 15 International Institute for Democracy and Littlefield, 2001), pp. 25-46. Electoral Assistance, “22. Are There Provisions for 18 Jonathan Mendilow, “Introduction: Political Direct Public Funding to Political Parties,” website, Finance, Corruption, and the Future of Democracy,” n.d. (accessed May 8, 2018), https://www.idea.int/ in Jonathan Mendilow, ed., Money, Corruption, and data-tools/question-view/548. Political Competition in Established and Emerging 16 Katz and Mair, “Changing Models of Party Orga- Democracies (Lanham: Lexington Books, 2012), p. nization and Party Democracy,” pp. 15-17. 31.

Page 6 ARMS TRADE CORRUPTION AND POLITICAL FINANCE eighteenth century England, the secret service proportional representation created a locus for fund paid for pensions and bribes that helped the clientelistic competition between factions inside government maintain control of parliament, and the Democrazia Cristiana (DC), Italy’s traditional may have been used to secure votes for the 1800 center-right party which fell apart as a result of union with Ireland.19 Bismarck retained a slush the revelations of the 1990s.23 Similarly, electoral fund to subsidize pro-government journalists reforms in Japan in 1994 were motivated by and to handle other miscellaneous political and a widespread perception that the previous state expenses.20 In Germany, as a case study system, with multi-member districts, was also below outlines, political leaders such as Helmut incentivizing illicit campaign finance.24 Others Kohl moved away from bribing the press and have noted comparable patterns of corruption toward distributing unaccounted cash to favor incentives in Brazil.25 The thesis behind this internal allies within the Christian Democratic relationship suggests that state funding for major Union (CDU).21 German defense firms likewise parties leads to the party leadership hoarding believed their political allies were passing funds legal revenues for competition with other to Canadian politicians as part of a 1983 power parties, leaving individual backbench candidates struggle within the Canadian Conservative party.22 seeking alternative sources of funding. However, broader empirical studies of the relationship In considering corruption within political parties, between electoral system type and corruption political scientists have focused their attention give us only partial confidence in this thesis.26 on investigating the relationship to particular electoral systems. With respect to Italy, Miriam Thus, the incentives for corruption created by Golden and Eric Chang argued that open-list problems of political finance may include both

19 Eveline Cruikshanks, “The Political Manage- 23 Miriam Golden and Eric C. C. Chang, “Com- ment of Sir Robert Walpole, 1720–42,” in Jeremy petitive Corruption: Factional Conflict and Political Black, ed., Britain in the Age of Walpole (Hound- Malfeasance in Postwar Italian Christian Democra- mills: Macmillan, 1984), p. 23; David Wilkinson, cy,” World Politics, Vol. 53, No. 4, (July 2001), pp. “‘How Did They Pass the Union?’: Secret Service 595-596. Expenditure in Ireland, 1799–1804,” History, Vol. 24 Takayuki Sakamoto, “Explaining Electoral 82, No. 266 (April 1997), pp. 223-251. Reform: Japan versus Italy and New Zealand,” Party 20 Stewart Stehlin, Bismarck and the Guelph Politics, Vol. 5, No. 4 (Oct. 1999), pp. 419-438; Gary Problem 1866-1890 (The Hague: Martinus Nijhoff, W. Cox and Michael F. Thies, “The Cost of Intraparty 1973), pp. 194-211. Competition: the Single, Nontransferable Vote and 21 Carolyn M. Warner, The Best System Money Money Politics in Japan,” Comparative Political Can Buy: Corruption in the European Union (Ithaca: Studies, Vol. 31, No. 3 (June 1998), pp. 267-291. Cornell University Press, 2007), p. 139; Holger Mo- 25 Barbara Geddes and Artur Ribeiro Neto, “In- roff, “American and German Fund Raising Fiascoes stitutional Sources of ,” Third and their Aftermath,” in Arnold J. Heidenheimer World Quarterly, Vol. 13, No. 4 (Jan. 1992), pp. and Michael Johnson, eds., Political Corruption: 647-649. Concepts and Contexts (New Brunswick: Transaction 26 Matthew C. Stephenson, “Corruption and Publishers, 3rd Ed., 2002), pp. 690, 704-705. Democratic Institutions: A Review and Synthesis,” 22 Stevie Cameron and Harvey Cashore, The Last in Susan Rose-Ackerman and Paul Lagunes, eds., Amigo: Karlheinz Schreiber and the Anatomy of a Greed, Corruption, and the Modern State: Essays Scandal (Toronto: Macfarlane Walter & Ross, 2001), in Political Economy (Cheltenham: Edward Elgar, pp. 66-67, 129-130. 2015), p. 119.

Page 7 ARMS TRADE CORRUPTION AND POLITICAL FINANCE general election campaigning and intra-party eighteenth century.29 In the Philippines, vote- concerns. Further, the line between politically buying through canvassers is supplemented by motivated corruption and personally motivated coercion and even assassination of vote-brokers.30 corruption is also thin, and the methods for In political systems where the executive holds one can easily be applied to the other. In Brazil an even more tenuous monopoly on violence, after the restoration of democracy in 1985, a such as the states of the Horn of Africa over surge in greed-motivated corruption—a relative the last decades, vote-buying can blur into gun- novelty that arose because of increasing political buying—using bribes and other forms of state fragmentation—built on a foundation of older, largesse to secure the loyalties of armed groups.31 “traditional” political corruption.27 Further, there is a blurry distinction between a single act of bribery that is politically motivated for the bribe-giver but personally motivated on the side 2.THE INTERFACE BETWEEN of the bribe-taker, and bribery that is politically POLITICAL FINANCE AND motivated on both sides of the transaction. THE ARMS TRADE Indeed, the power to allocate ministerial and The arms trade is well-suited toward corruption senior bureaucratic posts that come with standard in general, and some of the factors which claims to a cut in bribes can be a powerful tool for create that fit are also particularly well-suited keeping together a political coalition. Thus, even toward advancing political finance.32 This cases where no money went toward electoral section identifies three such factors: secrecy or publicity expenses and all of the associated and special prerogatives, the involvement of bribes were attributable to personal accounts can top decision-makers, and the opportunities for still be counted as a case of political corruption. offsets. In addition, access to the arms trade can In political systems where political parties are be a direct source of political power, controlled weaker and only fronts for elite, oligarchic, or by the head of state to build patronage. warlord competition, the role of corruption in building political coalitions can be more naked. 29 William Callahan, “Political Corruption in In young or partial democracies—including Southeast Asia,” in Robert Williams, ed., Party those of Western Europe—vote-buying is or Finance and Political Corruption (Basingstoke: has been a common practice. Even in systems Palgrave Macmillan, 2000), pp. 168-171; Geddes and dominated by a single political party, such as Ribeiro Neto, “Institutional Sources of Corruption post-independence India, vote-buying can be in Brazil,” p. 645; Pinto-Duschinsky, “Financing an instrumental part of politics, spreading to Politics: A Global View,” p. 72; Donatella Della Porta 28 newer political parties as they arise. For senior and Alberto Vannucci, The Hidden Order of Corrup- party leadership, bribes function as a means to tion: An Institutional Approach (Farnham: Ashgate, win over political operatives at the local level 2012), pp. 98-100. that can deliver votes; this was as true of Brazil, 30 Callahan, “Political Corruption in Southeast Thailand and Italy in the 1990s as England in the Asia,” pp. 172-175. 31 de Waal, The Real Politics of the Horn of Africa, 27 Geddes and Ribeiro Neto, “Institutional Sources pp. 39-40, 55-56. of Corruption in Brazil,” p. 642. 32 For more discussion of the characteristics of 28 Gurharpal Singh, “Understanding Political Cor- the arms trade that make it particularly susceptible ruption in Contemporary Indian Politics,” Political to corruption, see Holden, ed., Indefensible: seven Studies, Vol. 45, No. 3 (Aug. 1997), pp. 626-63. myths that sustain the global arms trade.

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Secrecy and Special sources of corrupt funds. The arms business’s Prerogatives inherent secrecy meshes well with the financial secrecy that is essential to corruption in general, The secrecy inherent in the arms trade stems including political corruption. The role of non- from several well-established characteristics. transparent banking jurisdictions, and non- First, because the arms trade implicates transparent corporate registration, in facilitating questions of national defense and foreign policy, the corrupt financial flows involved in both the details on procurement decision-making are payment of bribes, and the laundering of the automatically subject to classification or other proceeds, is widely discussed, and was brought secrecy provisions. This may limit participation into sharp focus by the release of the Panama of parliamentarians in verifying the integrity Papers and Paradise Papers.33 For political of a procurement deal, restricting oversight. entrepreneurs, access to a secret, offshore Second, both because government ministers are contingency fund is an extremely valuable asset. afforded considerable discretion in foreign policy The fact that the arms business naturally lends and because the number of relevant factors itself to non-transparent dealings and secretive weighed in an arms procurement program operators and intermediaries facilitates this. against each other are high, the precise grounds for awarding any specific arms contract can be murky. In awarding a tender, a government Top Decision-Makers might consider—for perfectly legitimate reasons—considerations of cost (immediate and Of all the forms of government corruption, lifetime), military effectiveness, interoperability, corruption in the arms trade is most likely to financing, technology transfer, supplier touch senior members of government. These reliability, and diplomatic considerations. The political leaders have a strong interest in upshot of this complexity is difficulty in assessing political finance because they are driven by the the integrity of a tender process from the overarching drive to remain in office.34 Unlike outside, which affords a corrupt decision-maker the bureaucrats and lower-level policy-makers considerable protection from scrutiny. Third, who sign off on other types of procurement the dual complexity and secrecy surrounding programs, arms transfers often require the buy- the technical details of modern weapons systems in of multiple ministerial principals: foreign, renders external validation of prices difficult. defense, and finance ministers typically, and This is particularly true of newer weapons in many cases also the head of government. In systems, of systems reliant on highly secretive addition, certain top public servants or political technologies, such as , and of 33 International Consortium of Investigative Jour- systems that are customizable and tailored to the nalists, “The : Exposing the Rogue needs of specific clients. As a result, questionable Offshore Finance Industry,” website, first created pricing can only be exposed with the help of Apr. 3 2016, https://www.icij.org/investigations/ military or technically proficient whistleblowers, panama-papers; International Consortium of Inves- or similarly qualified personnel employed by tigative Journalists, “The Paradise Papers: Secrets of opposition parties or non-governmental entities. the Global Elite,” website, first created Nov. 5, 2017, As discussed in section 1, the need for ‘off- https://www.icij.org/investigations/paradise-papers. budget’ sources of funds is frequently a critical 34 Bruce Bueno de Mesquita, James D. Morrow, consideration for political financiers. Considering Randolph M. Siverson, and Alastair Smith, The Logic the secrecy discussed above, the arms trade has of Political Survival (Cambridge: The MIT Press, a clear built-in advantage over other potential 2003).

Page 9 ARMS TRADE CORRUPTION AND POLITICAL FINANCE appointees, such as the chief of defense staff, personal enrichment, at least when compared the head of defense procurement, the national with bribes offered to lower government officials. security advisor, and the head of the Central Bank may often play a key role. For two reasons, senior government ministers are likely to be interested Offsets in political finance. First, as the public face of the government they bear the primary responsibility The arms trade is also unique because of the for the electoral success of their political party (or prevalence of offsets: contract requirements parties, in a coalition). Second, as senior partners that the winner of a tender return part of in a ruling group, they will likely have risen to the project value into the economy of the their position on the back of intra-party networks tendering country, either through equity and horse-trading, raising the likelihood that investments or subcontracts to local firms. In they are both interested in and have experience all other areas of international procurement with finding patronage opportunities and and trade, offsets are barred by the 1996 GATT 36 funding for internal campaigns. If we view top Agreement on Government Procurement. political leaders as “political entrepreneurs” Offset requirements can be “direct,” or dedicated at the head of political business enterprises, to the buying country’s arms industry, or they face a choice analogous to that of the “indirect,” targeted toward unrelated sectors CEO of a company: how much of the profits to of the economy. The choice between the two reinvest in the political venture, and how much has much to do with the maturity of existing to distribute as dividends to “shareholders”. military industry in the buying country and its In Nigeria, for example, Daniel Jordan Smith ability to absorb new technology and investment. notes, “to be a patron is to be under great In a typical example of direct offsets as part of pressure to accumulate and to share wealth… the an industrial development policy, when Japan pressure to use one’s position to benefit people negotiated in 1978 the purchase of 213 F-15 35 in networks of personal association is intense.” combat aircraft from the United States, Japanese Moreover, senior government officials fall under policymakers were willing to pay a price 2.5 times the greatest public scrutiny and therefore have the off-the-shelf cost of the aircraft in order to the most difficult time hiding corruption for secure local co-production commitments from the 37 personal gain—although they may also be the best selling firms. In 1993, the United Arab Emirates equipped for this challenge. In addition, because (UAE) adopted the opposite policy of favoring of the long career commitments and expensive indirect offsets; French tank manufacturer GIAT coalition-building efforts required to reach their positions, senior politicians may have a greater 36 E. Anders Eriksson, “Study on the effects of need over the course of their careers to put the offsets on the Development of a European Defence profits of corruption toward amassing power Industry and Market,” European Defence Agency, rather than personal profit. Thus, if bribes are Final Report of 06-DIM022, July 2007, p. 24. Also offered in an arms tender, they may be more likely see Ben Magahy, Francisco Vilhena da Cunha, and to be put toward political purposes rather than Mark Pyman, “Defence Offsets: Assessing the Risks of Corruption & Raising Transparency,” Transparency 35 Daniel Jordan Smith, “Popular Participation in International, (London: Transparency Internation- ,” in Robert I. Rotberg, ed., Cor- al—UK, 2010). ruption, Global Security, and World Order (Wash- 37 Travis K. Taylor, “Modeling offset policy in gov- ington D.C.: Brookings Institution Press, 2009), p. ernment procurement,” Journal of Policy Modeling, 289. Vol. 25, No. 9 (Dec. 2003), p. 988.

Page 10 ARMS TRADE CORRUPTION AND POLITICAL FINANCE industries was obliged to invest in a racecourse, The introduction of sub-contractors by itself desalination and thermal power plants, the creates new opportunities for graft, which can production of air conditioning systems and be multiplied by the intermediation of brokers medical equipment, and a steel cutting plant, and agents. For example, after EADS (later, as well as the country’s maritime transport Airbus Defense) signed a deal with Austria in and merchant banking sectors.38 The evolution 2002 to sell 18 Eurofighter combat aircraft, it of the UAE’s offset policy since the 1990s has contracted an intermediary to encourage Italian eliminated industrial concerns entirely and now firms to invest in Austria to satisfy EADS’ offset requires contributions to offset investment funds obligations. This intermediary received EUR 84 managed by professional advisors, into which million for his efforts; some of this was lost in defense exporters make eligible contributions.39 a Ponzi fund he set up, but at least some was used as bribes, according to investigators.40 Both forms of offsets, however, are susceptible to political corruption. Because offsets imply a Offsets may provide an attractive channel for discretionary opportunity for the selling firm corruption in arms deals in general (political or or the buying government to pick and choose otherwise), as they add an extra layer of obscurity partners in the buying state, they create lobbying and deniability to the process. A large commission incentives for potential partners. Allotting offset payment to an agent who provides no obvious investments can serve as a mode of patronage, service to justify the payment is inherently rewarding political supporters and their aligned suspicious. But an offsets package, negotiated business interests. Offset arrangements, even with no transparency, and where many of the those for indirect offsets, are typically highly specific offset investments are not made public, opaque, with details of individual contracts rarely may not give rise to clear grounds for suspicion, made public, unless it is in the interests of one or such as large payments of a dubious nature. No other party to do so. Thus, it is much harder for shell companies and offshore accounts need be the public and regulatory authorities to scrutinize used. Even sole source contract awards of offset just who is benefiting from offset investments and transactions may be justifiable on the surface, for contracts. One example of how this can operate example if the company in question is the only is in the South African Arms Deal (see section one in the recipient country able to manufacture 4), where Defense Minister Joe Modise bought a particular component that is the subject of a shares in a company, Conlog, which shortly direct offset. Thus, decision-makers might steer afterwards received offset investments and offset negotiations towards subcontracting that contracts from BAE Systems as part of the deal. they know they or their allies will benefit from, possibly without the exporting company being

38 Susan Willett and Ian Anthony, “Countertrade 40 Fredrica Angeli, “Parioli, la truffa ai vip Lande and Offsets Policies and Practices in the Arms Trade,” e gli affari con la Difesa” [Parioli, Lande’s VIP scam, Peace Research Institute, Working Pa- and business with the Defense Ministry], La Repub- per No. 20, Copenhagen, 1998. blica (online), June 3, 2011, http://roma.repubblica. 39 Willett and Anthony, “Countertrade and Offsets it/cronaca/2011/06/03/news/parioli_la_truffa_ai_ Policies and Practices in the Arms Trade”; Shana vip_lande_e_gli_affari_con_la_difesa-17141437; Kid Marshall, “The New Politics of Patronage: The Arms Möchel and Christrian Böhmer, “Die dubiosen Geld- Trade and Clientelism in the Arab World,” Crown flüsse im Eurofighter-Krimi” [The dubious cashflows Center for in the Eurofighter thriller], Kurier.at (online), Nov. Middle East Studies, Brandeis University, Working 20, 2012, https://kurier.at/politik/inland/die-dubi- Paper 4, Oct. 2012, p. 25. osen-geldfluesse-im-eurofighter-krimi/1.328.330.

Page 11 ARMS TRADE CORRUPTION AND POLITICAL FINANCE aware of the corrupt nature of the transaction. of observers.42 In the Philippines, political If the seller company makes use of offset agents, assassinations and other forms of violence are these may be paid a legitimate fee for selecting targeted not at voters, but at the vote brokers who and arranging offset transactions; if some of these drum up electoral participation at the local level.43 happen to provide corrupt benefits for decision- In Kenya, the ‘youth wings’ of political parties makers or those linked to them, then even if this are de facto vote enforcers for those parties, and is discovered, it may be hard to demonstrate deterrents for supporters of rival parties.44 And that the exporting company has been culpable, in systems with weak electoral mechanisms, the for example through lack of due diligence.41 buying off and management of armed groups can be the central dynamic in national politics. There are at least nine cases covered by the Compendium, out of 23 involving international What is common across this spectrum is a arms deals, where offsets have been clearly vision of politics as a marketplace, where identified as a vehicle of corruption. This likely competing candidates for leadership manage a only scratches the surface, however, given political budget to buy the loyalties of important difficulties in cataloging offset arrangements and constituent groups.45 In a system with strong identifying who may have benefited from them. electoral institutions, it is simpler and cheaper to use that political budget to contract for votes in a general election or build a patronage Access to Arms and Organized network within a political party. In a polity with Violence weak or non-existent institutions, building a coalition of armed groups out of organic and pre- If in established democracies the currency of existing political identities becomes the chief political power is literally currency, in states preoccupation of the political entrepreneur. with a less-complete monopoly on violence, In Alex de Waal’s original conceptualization the currency of political power can be arms of the political marketplace, the broken states themselves, and the wielders thereof. Violence, of East Africa, namely Sudan and Somalia, or the command of the loyalties of armed groups, served as the primary examples of this form be they units of the armed forces, sub-state of entrepreneurship. In earlier days, when armed organizations, or security contractors, small arms were still scarce in the Horn, even can substitute for money along a spectrum. access to firearms themselves, necessarily In a corrupt but established electoral system mediated through diplomatic connections such as Italy’s, illicit violence plays a tacit role to the imperial powers of the outside world, in enforcing the quid pro quo underlying a could be the basis of political power as well.46 corrupt relationship and in ensuring the silence

42 Newell, “Party Finance and Corruption: Italy,” 41 For a discussion of some of these issues, see for p. 68. example “Due diligence and corruption risk in de- 43 Callahan, “Political Corruption in Southeast fence industry offset programmes”, Transparency In- Asia,” pp. 172-175. ternational, 2012, http://ti-defence.org/wp-content/ 44 Peter Mwangi Kagwanja, “‛Power to Uhuru’: uploads/2016/03/2012-02_DueDiligenceAndCor- Youth Identity and Generational Politics in Kenya’s ruptionRiskInOffsets.pdf; and Weissman, H. “Offset 2002 Elections,” African Affairs, Vol. 105, No. 418 deals can pose high FCPA risks for defense industry”, (Jan. 2006), pp. 55-56. Global Compliance News, 2 December 2014, https:// globalcompliancenews.com/offset-deals-can-pose- 45 de Waal, The Real Politics of the Horn of Africa. high-fcpa-risks-for-defense-industry/. 46 Jonathan A. Grant, Rulers, Guns, and Money:

Page 12 ARMS TRADE CORRUPTION AND POLITICAL FINANCE

The role of corruption in this model of politics Each of the studies in the subsequent section is to provide a vital source of contributions to of this paper will address these in turn. the political budget of prospective leaders. The The first is whether the bribes are necessary specific importance of arms trade corruption, because they have a specific purpose, or then, is that only leaders who already control whether graft is built into a deal as a matter the state can access this source, which creates of normalized profiteering. Another way an asymmetric advantage over non-state groups. to think of this distinction is whether the deal While arms smuggling and illicit brokers can still would have been concluded, along its final operate in the shadows to provide war material terms, but for the bribes. This distinction is to both the state’s challengers and to informal not identical to the question of whether the pro-regime armed groups, the international bribes serve a “political” purpose, however, trend has been toward reaffirmation of state-to- because normalized profiteering can be a perk state transfers as the only legitimate channel for of sinecures—whether cabinet posts or senior the arms trade. The Arms Trade Treaty, which administrative or military postings—handed out obligates states parties to adopt trade controls as a reward for loyal support within a political over most weapons systems, merely confirms this patronage network.47 As such, both bribes norm. The more complex the weapons systems a associated with a specific purpose and as a reward state seeks to acquire, the more likely it will have for normalized profiteering could be “political.” to be procured through legitimate channels. But the more complex a system is, the more it will A second dimension is whether the bribes are cost, and therefore the greater the rewards to paid out to recipients in the arms-exporting negotiating a percentage commission for parties country or in the arms-importing country, involved. Thus, control of the state—and the or both. Bribes are almost always paid through diplomatic options it comes with—can be an an intermediary who controls or can create a important way a successful political entrepreneur network of shell companies and bank accounts entrenches their initial success in seizing power. for transmitting the funds.48 As a result, with a mechanism for obscuring the transfer, origin, and destination of funds already in 3.FIVE DIMENSIONS OF place, it is of marginal difficulty for bribes CORRUPT ARMS TRADE DEALS 47 The term “sinecure” is used throughout this paper as an adaptation of the traditional usage, em- In the 29 cases of arms trade and military phasizing that these roles are assigned as rewards for corruption collected in the Compendium of loyalty. While the traditional usage also implies that Arms Trade Corruption, a large proportion can these roles have no real responsibilities, this aspect of be connected to political finance considerations. the term is not central to our concepts. This connection can be justified by a number 48 For a discussion of lawyers as intermediaries, of distinct political rationales and take any see Zachary D. Cregar, “Foreign Corruption by Pay- number of forms. In comparing the cases, ment of Legal Bills: Guidance on Proactive Detection however, we are able to draw out several of FCPA Violations Via Payments to Outside Legal dimensions of particular interest in the cases. Counsel,” Duquesne Business Law Journal, Vol. 14, No. 1 (2011), pp. 1-18; more generally, Susan The Global Arms Trade in the Age of Imperialism Rose-Ackerman, “The Law and Economics of Bribery (Cambridge: Harvard University Press, 2007), pp. and Extortion,” Annual Review of Law and Social 47-77. Science, Vol. 6, (2010), pp. 233-234.

Page 13 ARMS TRADE CORRUPTION AND POLITICAL FINANCE to be paid to both sides in the transaction. A fourth dimension is whether the bribe- In the French context, kick-backs to officials taker intends for the corrupt monies to serve a in the arms exporting country are known as normal competitive political function— “retro-commissions,” which were resorted to such as running a political party, funding a party in the 1990s as a method for circumventing newspaper, or competing in an election—or strict campaign finance regulations.49 allocates the funds to patronage activities, such as building a network of clients, rewarding A third dimension is whether the political purpose loyal supporters, or cutting informal power- behind the graft serves primarily the bribe-giver sharing deals. While it might, at first glance, or the bribe-taker. Examples of cases where seem possible to simplify and re-formulate this the purpose of the corruption primarily serves distinction as one between inter-party and intra- the bribe-giver include tender-manipulation or party competition, this is not possible because defeat of an embargo. In such situations, the patronage networks can operate across party bribe-giver first decides that corruption can lines as well, typically in political systems with help them to secure the deal, after which they numerous parties and cross-party government seek out a pliant politician or administrator to coalitions.50 Examples where funds went toward corrupt. In the alternative, the bribe might be normal competitive political functions would requested on the bribe-taker’s side first, driven include the French retro-commission cases, by political finance concerns. In reality, there the Austrian Eurofighter deal, in which a large may be purposes on both sides of the corrupt contract for political advertising was assigned transaction that are served simultaneously, and to a friend of a politician, and the - it is typically impossible to determine which related prong of Brazil’s ongoing Lava Jato side suggested a bribe first. In the Belgian investigations. An example where funds likely Socialist Parties’ case, a trial court weighed the went toward patronage activities include the CDU contradicting statements of representatives of party funding scandal, in which investigators and the bribe-taker and bribe-giver, who each alleged commentators strongly suspected that bribes that the other broached the topic of a bribe first. returned to Helmut Kohl’s allies were intended for supporting favored candidates within the 49 In this paper, the term “commissions” is used party, since general elections in the German to describe payments, legal or illegal, to agents for system are already supported by state funding. services related to a major arms transaction. Legiti- mate commissions might be paid for brokering a sale, The fifth and final dimension of interest is for marketing, or for any other number of related whether bribes are centralized under the services; legitimate commissions should not be con- control of a political leader or decentralized fused for bribery. However, in discussing corruption and distributed across a number of individuals. in the arms trade, writers often do confuse the two If the bribes are centralized, the illicit funds flow because commissions are closely tied to bribes in at directly into a political entrepreneur’s private least two ways. First, commissions can be inflated or political budget, from which the entrepreneur paid out for non-existent services, thus constituting can subsequently draw on to make decisions a fraudulent side-payment. Second, the recipient of about building out a patronage network or commissions might be a middleman who passes on funding legitimate party functions. If the bribes the monies to an ultimate bribe-taker. In most juris- are decentralized, then the funds are distributed dictions, legitimate commissions are not illegal; one across a patronage network, where each notable exception is India, where defense procure- ment laws have outlawed commissions entirely in an 50 As described below, this was likely the pattern attempt to limit corruption. in the Indian Barak missiles scandal.

Page 14 ARMS TRADE CORRUPTION AND POLITICAL FINANCE recipient occupies a sinecure at the pleasure question in these cases is whether the services they of a political entrepreneur who has assigned provided in return for the money they received them the role—ministerial, administrative, was simply a matter of lobbying and advising, judicial, or military—as part of a patron-client with no further money changing hands, or if they relationship. This decentralized form of corrupt were effectively acting as highly-placed agents rewards across a patronage network could to channel bribes to current decision-makers. also be conceptualized as bribery “ex officio.” Table 2 (pages 17-18) lists the cases in the In a number of cases, there is ambiguity as to Compendium and their relationship to political whether bribes should be considered to be related finance, if any, based on the “who, where, why, to political finance at all, notably when bribes and what for” of the corrupt activities; the “why” are given to politicians but it is unclear whether and “what for” potentially applying to actors the money is used for personal enrichment or in both the buyer and seller countries. This for political purposes—such money is, after all, does not directly address all the dimensions fungible.51 The recipients may be government discussed above, but relates them and illustrates ministers (such as the former Greek Minister of the diversity of ways in which political finance Defense, Akis Tsochatzopoulos, implicated in corruption can manifest itself in the arms trade. numerous bribery cases)52; legislators, in cases This should be taken as an indicative selection where parliament has a role in arms import rather than a representative sample. Several of decisions (for example, in the Czech Republic)53; these cases are discussed in more detail in the or influential ex-leaders, such as Brian Mulroney subsequent sections. They were chosen because in the German Christian Democratic Union they demonstrate the full range of possibilities political funding case discussed below, or former across the five dimensions discussed above. Brazilian president Luiz Inacio Lula da Silva, recently accused of taking bribes to influence Brazil’s fighter aircraft tender in favor of the Saab 54 4. CASE STUDIES: PARTY Gripen after leaving office. The unanswerable FUNDING, POLITICAL BUDGETS, SINECURES, AND 51 Further, the unpredictability of political life COALITION BUILDING means that politicians may hold funds which can be used either for future political spending, or for a The cases covered by the Compendium span comfortable retirement should their political fortunes many of the dimensions discussed in section 3 move in the wrong direction. (above), in terms of the types of recipient, the purposes served by the corruption, and the use 52 Niki Kitsantonis, “Ex-Minister in Greece to which the corrupt finance was put. These Is Found Guilty in Bribery Case,” The New York include direct funding of political parties and Times (online), Oct. 7, 2013, https://www.nytimes. their regular activities, bribes to top politicians, com/2013/10/08/world/europe/greek-ex-minister- payments to legislators to buy their support, is-convicted-in-bribery-case.html. cases where funds went toward refilling a central 53 Dita Asiedu, “Czech Politicians under Suspicion political budget, and where they were distributed of Corruption involving Gripen Deal,” Radio Praha, across a number of recipients and served as Feb. 21, 2007, http://www.radio.cz/en/section/cur- raffrs/Czech-politicians-under-suspicion-of-corrup- Reuters, Dec. 9, 2016, https://www.reuters.com/ tion-involving-gripen-deal. article/us-brazil-politics-lula/brazil-prosecutors- 54 Eduardo Simões and Marcelo Teixeira, “Brazil say-lula-acted-for-saab-to-win-jets-order-idUSKB- prosecutors say Lula acted for Saab to win jets order,” N13Y2PE.

Page 15 ARMS TRADE CORRUPTION AND POLITICAL FINANCE payouts to sinecures held by key leaders in a expenses has a broad geographic spread. In South political alliance. In one case, South Africa, the Africa, French firm Thales has been accused of corruption included several of these different bankrolling the African National Congress in the features, and can be seen as part of building 2006 elections, as part of an ongoing relationship a broad political coalition to support the deal. arising from the infamous arms deal of the late 1990s.57 In Portugal, wiretaps suggested that This section draws on a number of cases a German submarine consortium contributed from the Compendium to illustrate these EUR 1 million to a center-right political party different aspects, focusing on bribes paid in as well.58 In the Czech Republic, the ODA party the recipient country, while the next section received an anonymous offer by telephone of focuses on ‘retro-commissions,’ where corrupt SEK 10 million in exchange for votes supporting payments were (also) made in the seller country. the Saab Gripen combat aircraft. Overall, In some cases there have not been sufficient commissions of at least GBP 40 million were investigation in the recipient country to paid to middlemen in connection with the deal in classify the type of political finance corruption the late 1990s and early 2000s, likely channeled associated with an arms deal; for example, in the in bribes to Czech politicians, including MPs of Malaysian submarine scandal, former Defense all parties, to gain their support for the deal.59 and Prime Minister Najib Razak is suspected of receiving large bribes, but it is likely that much Funding the Belgian Socialist Parties of these funds were directed to the coffers of the ruling party, UNMO.55 In Malaysia, a flawed A particularly well-documented case that democracy, efforts to investigate the potential resulted in a full prosecution and trial is corruption have been stymied, so that a clearer that of the late 1980s arms deals in Belgium. understanding of the political purposes behind The two allied Belgian socialist parties—one the deal is not currently possible. Razak was operating in French-speaking Wallonia and voted out of office in May 2018, and is now the other in Dutch-speaking Flanders—were facing possible prosecution in an even larger beneficiaries of bribes from two arms firms corruption scandal, so it is possible that the in this scandal, Italy’s Agusta helicopters and submarine case may also finally be investigated.56 France’s Electronique Serge Dassault (ESD), part of the family of arms and other companies owned by the powerful Dassault family, as part Direct party funding 57 Stephan Hofstatter, Mzilikazi wa Afrika, Piet The set of cases in which corrupt funds went Rampedi and André Jurgens, “EXPOSED: How toward campaign and other regular party arms dealer bankrolled Zuma,” Sunday Times 55 According to the “Paris papers”, which are (online), Sep. 28, 2014, https://www.timeslive. linked to from the case write-up in the Compen- co.za/sunday-times/investigations/2014-09-28-ex- dium. See https://sites.tufts.edu/corruptarms- posed-how-arms-dealer-bankrolled-zuma. deals/2017/05/05/the-Malaysia-scorpene-subma- 58 Ana Gomes, “Complaint to the EC Commission rine-affair/. Regarding Infringement of the Community Laws,” 56 Shamim Adam and Laurence Arnlod, “A guide Feb. 3, 2012, https://www.anagomes.eu/PublicDocs/ to the worldwide probes of Malaysia’s 1MDB fund,” 66e9cd99-93f0-481a-8306-1e78d84cb8dc.pdf. Bloomberg (online), Mar. 7, 2018, https://www. 59 Andrew Feinstein, The Shadow World: Inside bloomberg.com/news/articles/2018-03-07/Malaysia- the Global Arms Trade (London: Hamish Hamilton, s-1mdb-fund-spawns-worldwide-probes-quicktake. 2011), pp. 197-224.

Page 16 TABLE 2: POLITICAL FINANCE CASES

WHAT WAS SELLER, WHY WAS THE THE MONEY CASE NAME BUYER WHERE? WHO? BRIBE PAID? USED FOR?

Allies of key deci- Austria Eurofighters Germany -> Austria Recipient only To win the contract Political patronage sion-makers

Lead political deci- ‘Normal’ aspect of arms Al Yamamah UK -> Recipient only Unknown sion-maker contracts with buyer

1) Leading politicians in 1) “Normal” profiteering 1) Unknown Seller and recip- Angola from contracts Angolagate France -> Angola ient 2) Political cover for illicit 2) Election campaign 2) Politicians in France deals funding

Embezzlement opportu- Politicians, business- Personal enrichment, nities created by control Armsgate Nigeria internal Nigeria men, military officers, political patronage of spending with no officials networks accountability

Senior politicians, party Barak missiles Israel -> India Recipient only To win the contract Political patronage officials

To win the contract and Personal - no Defense department Boeing tanker case US internal USA gain favorable treatment political finance official in contract negotiations connection

To be selected as main local partner. Possible Brazil submarine case France -> Brazil Recipient only Political party Party funding additional bribes to win contract

1) Political party (Ger- 1) To overcome arms 1) Party funding; many); allies of leading embargo and gain political political patronage politicians (Germany) support for deals CDU party funding Germany -> Saudi Seller and recip- 2) Normal profiteering scandal Arabia, Canada ients 2) Unknown (Saudi) 2) Unknown from contracts

3) Influential ex-leader 3) To help secure deal 3) Unknown (Canada)

Embraer’s global Brazil -> Dominican Recipient only Legislators To win the contract Unknown bribery scheme Republic

Ericsson radars to -> Greece Recipient only Senior politicians To win the contract Unknown Greece

Main corruption was Worldwide fake bomb that equipment was fake; No known political UK -> various Recipients Various detector scam bribes to secure sales of finance connection fake equipment

To gain access to No known political Fat Leonard Singapore -> USA Recipient Military officers information, and steer finance connection business to company

GPT communications Normal profiteering from No known political contract with Saudi UK -> Saudi Arabia Recipient Military officers contracts finance connection national guard

Gripen deals with Sweden/UK -> Political parties, Czech republic and Czech republic, Recipients To win the contracts Party funding legislators Hungary Hungary

Greek submarine Germany -> Greece Recipient Senior politician To win the contract Unknown scandal WHAT WAS SELLER, WHY WAS THE THE MONEY CASE NAME BUYER WHERE? WHO? BRIBE PAID? USED FOR?

German submarine Close ally of senior Germany -> Israel Recipient To win the contract Unknown sale to Israel politician

Politicians, party apparatchiks, politically India VVIP helicopters Italy/UK -> India Recipient To win the contract Political patronage well-connected individuals

1) Opportunity from 1) Election campaign 1) French politicians proximity to export funding Seller and decision and negotiation L’affaire Karachi France -> recipient 2) Pakistani military 2) Normal profiteering 2) Unknown officers, politicians from contracts

South Korea AW-159 UK/Italy ->South Manipulation of selection No political finance Recipient Military officers helicopters Korea criteria connection

Party funding Malaysia submarines France -> Malaysia Recipient Senior politician To win the contract (potentially) [1]

Ministry of defense Embezzlement via fake No political finance Milicogate Chile internal Chile officials contracts connection

Portuguese Germany -> Recipient Political party To win the contract Party funding submarines Portugal

Rolls Royce engines UK -> India Recipient Unknown To win the contract Unknown to India

UK, France, Senior politicians, Party funding, South Africa arms deal Germany, Italy -> Recipient political party, allies of To win the contracts political patronage South Africa senior politicians

South Korea Germany -> South No known political Recipient Unknown To win the contract submarines Korea finance connection

1) To overcome arms 1) Election campaign 1) Senior politicians embargo, opportunity funding from proximity to decision Taiwan Lafayette Seller, recipient, France -> Taiwan frigates 3rd party () 2) Unknown 2) To win the contract 2) Unknown

2) To overcome political 3) Unknown 3) Unknown opposition to deal

To win the contract Tanzania air traffic UK -> Tanzania Recipient Senior politician and secure finance Unknown control arrangements

NB: One case from the Compendium, “China’s crackdown on military corruption” is not included, as it is a discussion of the problems of corruption in the Chinese military in general, rather than of a specific corruption case.

[1] Comments by Dr. Kua Kia Soong at workshop on Global Arms and Corruption, June 4-5, 2018, London School of Economics. ARMS TRADE CORRUPTION AND POLITICAL FINANCE of two separate but contemporaneous deals. Flemish socialist party’s request, Puelinckx transferred BFR 51 million (EUR1.26 million) The first deal involved the replacement of through an account in Zürich, opened in the Belgium’s aging Alouette II reconnaissance name of a Panamanian shell company. The helicopters. The long-running tender process “gift” was transferred in two parts, one before concluded in December 1988, when, Agusta’s and one after the final decision on the deal. A-109 helicopter won the BFR 12 billion (EUR 297 million) contract for 28 armed and 18 Wallyn admitted that Agusta reached out unarmed variants, defeating a rival bid from because it knew key members of the Flemish France’s Aérospatiale.60 The second deal was socialist party would be involved in the tender for upgrades to the electronic counter-measure decision, which is why Delanghe was brought (ECM) systems of the Belgian Air Force’s F-16 into the conspiracy. Both Delanghe and his combat aircraft. The two primary competitors boss, Minister of the Economy Willi Claes, were ESD and Litton Industries. In May 1989, as well as Minister of Defense Guy Coëme, the Belgians selected ESD to provide 135 units also knew that some of the offset offers that (later reduced to 100 units) of its Carapace ECM were part of Agusta’s offer were impractical. system to upgrade the country’s entire fleet of The ESD scandal was also the product of the F-16s, at a price of BFR 8.6 billion (later reduced Wallyn-Puelinckx connection, and involved to BFR 7.5 billion, or EUR 186 million).61 two bribes, one of FFR 10 million (EUR1.52 A lawyer working on behalf of Agusta, Alfons million) to the Flemish socialist party, and one Puelinckx, reached out to a former Flemish of CHF 1.8 million (around EOR780,000) to socialist party official, Luc Wallyn while the the Wallonian party.63 In February 1989, shortly helicopter tender was ongoing, to offer a political after the Agusta contract was concluded, air donation from the Italian company. Wallyn force evaluators involved in the F-16 upgrade consulted with Etienne Mangé, the party’s tender submitted a report indicating that treasurer, and Johan Delanghe, the highly they preferred Litton Industries’ TWS-95 influential secretary of Economy Minister Willi radar warning receiver over ESD’s Carapace. Claes. Mangé had previously been tasked with The Dassault family of companies had a long cleaning up the perennially bankrupt accounts history of lobbying political parties that wielded of the party’s newspaper, De Morgen.62 At the authority in procurement decisions. Accordingly,

60 “L’achat de 46 hélicoptères par la Défense natio- Puelinckx put ESD in business with Wallyn, and nale” [The purchase of 46 helicopters by the Ministry through him with key Socialist politicians involved of National Defense], L’Echo (online), Nov. 26, 1988, in the deal—chiefly Guy Coëme, the defense https://www.lecho.be/actualite/archive/L-achat-de- minister, and Johan Delanghe, aide to Economy 46-helicopteres-par-la-Defense-nationale/8319737. Minister Willy Claes. These put pressure on the Air Force to change their report favoring Litton 61 “Belgium buys French ECM,” Flight Interna- under threat of a total cancellation of the tender. tional, May 13, 1989, https://www.flightglobal.com/ The pressure worked: in April 1989, Air Force FlightPDFArchive/1989/1989%20-%201341.PDF. Lt. Gen. Alexander Moriau filed an addendum to 62 Rik Van Cauwelaert, “Etienne Mangé en ‘Het waanzinnige avontuur van De Morgen’” [Etienne 63 Mary Dejevsky, “Dassault arrest warrant to rock Mangé and ‘The Crazy Adventure of De Morgen’], France and Belgium,” The Independent (online), Knack (online), Aug. 22, 2012, http://www.knack.be/ May 9, 1996, https://www.independent.co.uk/news/ nieuws/etienne-mange-en-het-waanzinnige-avontu- world/dassault-arrest-warrant-to-rock-France-and- ur-van-de-morgen/article-opinion-44872.html. belgium-1346497.html.

Page 19 ARMS TRADE CORRUPTION AND POLITICAL FINANCE the report that eliminated the preference for the While the court concluded that Puelinckx, acting Litton offer, claiming that further negotiations on behalf of Agusta and ESD, likely reached with ESD had made the two offers equivalent.64 out to Wallyn first, the large number of party In fact, as Moriau later admitted, there had been officials involved in the conspiracy suggest that no further negotiations with ESD and the claim they understood the offer as an opportunity to made in the addendum was therefore fraudulent. fill party—rather than personal—coffers. Thus, A trial in 1998 convicted three ministers, the corruption had a clear political purpose for including Guy Coëme and Willi Claes, as well as both ends of the transaction. Besides the specific aides Mangé, Delanghe, Wallyn, and others, for allegations against Claes mentioned above, there their involvement in the Agusta and ESD bribes. is little indication in the court judgment or press reports that the funds went toward patronage The Belgian Agusta/ESD scandals had a clear activities or personal enrichment. Accordingly, nexus with political finance even though a few the corruption was highly centralized through the cash deposits into Claes’ personal accounts involvement of the party treasurer, despite the were brought up as evidence of personal large number of officials implicated in the case. corruption at trial as well.65 The Flemish socialist party knew by the early 1990s, that it had a checkered past to hide. Frank Vandenbroucke, Patronage – Political Budgets a Belgian foreign minister and a member of and Sinecures the Flemish socialist party, ordered Mangé, the treasurer, to burn a pile of the party’s cash that Corruption in political finance can be motivated he discovered in 1991.66 Mangé never followed by intra-party competition as much as electoral through on the order, and when the facts of the campaigns between parties, as discussed incident came out in March 1995 during the above. In the Compendium on Arms Trade course of the broader corruption investigation, Corruption, we can divide the intra-party bribes Vandenbroucke was forced to resign.67 into centralized patronage-building funds, and decentralized payments to members of an 64 “Belgium buys French ECM,” Flight Interna- existing patronage network holding positions tional, May 13, 1989. of power (“sinecures”). The individuals in these 65 Patrick Smyth, “Belgian court finds Claes, 10 of- networks expect such payments as part of the ficials and French businessman guilty of corruption,” rewards of power. The CDU party funding The Irish Times (online), Dec. 24, 1998, https://www. scandal, discussed in the following section on irishtimes.com/news/belgian-court-finds-claes-10- retro-commissions, is the most clear-cut example officials-and-french-businessman-guilty-of-corrup- of the first type, in which a senior party leader, tion-1.228702. namely Helmut Kohl, admitted accumulating off-budget funds and distributing them to local 66 Jos Klaasen, “Minister van BZ in Belgie treedt parties at his discretion.68 This admission is a af wegens Agusta-affaire” [Belgian foreign minister resigns over Agusta affair], De Volkskrant (online), 68 Moroff, “American and German Fund Raising Mar. 23, 1995, https://www.volkskrant.nl/archief/ Fiascoes and their Aftermath,” pp. 690, 704-705; minister-van-bz-in-belgie-treedt-af-wegens-agusta- Warner, The Best System Money Can Buy, p. 139; affaire~a395144. Imre Karacs, “KOHL SCANDAL: Europe’s old master 67 Sarah Helm, “Belgian MPs Vote to Send Claes admits he ran secret slush funds,” The Independent for Trial,” The Independent (online), Oct. 19, 1995, (online), Dec. 1, 1999, https://www.independent.co./ https://www.independent.co.uk/news/world/bel- news/world/kohl-scandal-europes-old-master-ad- gian-mps-vote-to-send-claes-for-trial-1578457.html. mits-he-ran-secret-slush-funds-1124613.html.

Page 20 ARMS TRADE CORRUPTION AND POLITICAL FINANCE rarity. In the majority of similar cases, we can the order again to 15 planes in June 2007.72 describe patronage interests—or the refilling Several separate corruption mechanisms have of a “political budget”—as a motivator only been alleged in relation to the Austrian Eurofighter by relying on inference. The second category, deal, including direct bribery. Of greatest where funds are distributed broadly across a relevance to the patronage thesis, however, is the number of government positions in the hands broad suspicion that the former finance minister, of key players in a ruling patronage network, Karl-Heinz Grasser of the Austrian Freedom is much easier to identify and describe. Party, as well as other decision-makers, had benefited their political allies by extracting offset The Austrian Eurofighter deal commitments from the competition’s winner.

One case in which the first type of patronage Before entering government in 2000, Grasser was could have come into play is the Austrian an employee of the Magna Group, a parts supplier Eurofighter acquisition scandal. In this case, to EADS-investor DaimlerChrysler. Magna was one of the purported beneficiaries of offset tipped to benefit from the offsets associated with deals associated with the contract was also a the tender, which required the aircraft supplier to benefactor to the politicians who approved make investment or supply contracts worth EUR the acquisition. In October 2001, the Austrian 4 billion with local firms.73 At least one Magna government approached aircraft manufacturers official, former manager Hubert Hödl, has as for bids to replace its fleet of Saab Draken fighter recently as March 2017 been investigated for aircraft.69 Three companies reached the final potential money-laundering charges associated stage of the tender competition: Saab, Lockheed with the offset schemes.74 Other suspicious Martin, and the Eurofighter consortium.70 In offset deals include an EADS investment into a July 2002, the government, a coalition between Carinthian technology park and a canceled plan the center- and far-right parties, decided to buy for the aircraft firm to invest in the redevelopment the Eurofighter Typhoon aircraft. Initially, 24 of the retired Spielberg racing track.75 aircraft were ordered, but this was reduced to 18 planes after floods in August 2003 forced a 72 Bundesministerium für Landesverteidigung, reallocation in government spending.71 After “Eurofighter-Einigung: Die Eckpunkte” [The Euro- further criticism and investigation of the deal, fighter Deal: The Key Points], Press Release, June a successor center-left government reduced 28, 2007, http://www.bundesheer.at/cms/artikel. php?ID=3475. 73 Dominik Baur, “Herr Stronach kauft sich 69 “Pentagon Proposes $1.7 Billion F-16 Sale Österreich” [Mr. Stronach buys Austria], Spiegel For Austrian Fighter Competition,” Defense Daily Online (online), July 4, 2003, http://www.spiegel.de/ International (online), Nov. 30, 2001, https://www. wirtschaft/polit-filz-herr-stronach-kauft-sich-oester- highbeam.com/doc/1G1-80447770.html. reich-a-255619.html. 70 The Eurofighter Consortium, which produces 74 “Eurofighter: Ermittlung gegen Ex-Magna-Vor- the Typhoon multi-role combat aircraft, is a joint stand” [Eurofighter: Investigation of Ex-Magna venture of EADS (now Airbus), BAE Systems, and Board], Steiermark ORF (online), Mar. 8, 2017, Alenia Aermacchi (part of Leonardo). http://steiermark.orf.at/news/stories/2829800. 71 David Gow, “Floods Bring Down Eurofighter,” 75 Martine Orange, Yann Philippin, and Lea Fauth, (online), Aug. 16, 2002, https://www. “Corruption: les documents qui accusent le patron theguardian.com/business/2002/aug/16/themili- d’Airbus” [Corruption: the documents which accuse tary.uk.news. the head of Airbus], Mediapart (online), Oct. 6,

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minister, A.P.J. Abdul Kalam, and other allies India: networks of and at the Defence Research and Development sinecures Organisation (DRDO), opposed the choice of the Two Indian cases are helpful in demonstrating Barak, advocating for the indigenously developed how corruption across a network of Trishul missile. The chief of naval staff, sinecures, the second category described Sushil Kumar, finally secured backing from above, can be carried out through an arms Defence Minister George Fernandes, over the deal. The Barak missile scandal, dating protest of Kalam, to purchase six Barak systems to 2000, illustrated a limited case of this in June 1999. These were to be outfitted on phenomenon, targeted at a single political the navy’s destroyers and frigates, as well party, while the VVIP helicopter case, as the INS Viraat, an aging aircraft carrier. from a decade later, produced allegations A media sting operation in 2001 (the ‘Tehelka stretching across the entire government. tapes’) recorded R. K. Jain, treasurer of the Other examples include Nigeria’s Armsgate Samata Party, part of the ruling coalition at the scandal, which involved all branches and time, claiming that he had acted as an agent levels of government, and the South African in the deal, passing on 3% of the value each to Strategic Arms Procurement Package. George Fernandes and party President Jaya The Barak missile acquisition program Jaitly, leading members of the party, while Jain originated in 1995 amidst growing Indian himself received 0.5%. Jaitly and Fernandes concern about its surface fleet’s vulnerability were both forced to step down from their to Pakistani anti-ship missiles.76 The Barak positions as a result of the revelations. India’s 1 missile defense system, manufactured by Central Bureau of Investigation (CBI) filed in Israel Aerospace Industries, was evaluated 2006 a First Information Report, indicating by the in December of that suspicions that Kumar had misrepresented year.77 The scientific advisor to the defense DRDO opposition to the deal to Fernandes, and that DRDO had been improperly overridden. 2017, https://www.mediapart.fr/journal/econo- mie/061017/corruption-les-documents-qui-ac- Suresh Nanda, an Indian businessman with cusent-le-patron-dairbus; Renate Graber, investments in the defense industry, was “Eurofighter flogen über Steueroase nach Kärnt- identified in the Tehelka tapes as the agent en” [The Eurofighter flew over a to who passed bribes to Jaitly directly. The CBI Carinthia], Der Standard (online), Mar. 12, 2017, found documents in Nanda’s possession, http://derstandard.at/2000054036208/Euro- relating to other arms companies and deals, fighter-flogen-ueber-Steueroase-nach-Kaernten. which suggested that Nanda acted illegally as an arms broker.78 They also found a number of 76 Nicolas Blarel, “Planes, Drones, Missiles: payments to the accounts of various companies How Kargil changed Indo–Israeli Relations,” The owned by Nanda, including one from MTU Caravan (online), Jan. 18, 2015, http://www. Aero Engines, a German sub-contractor for caravanmagazine.in/vantage/planes-drones-mis- IAI, and others from untraceable sources. siles-kargil-indo-Israeli-relations. Following seven years of investigation, however, 77 Israel Aerospace Industries, “Barak-1 Ship Point Defense System,” website, n.d. (accessed 78 “CBI vs. S. Suresh Nanda,” Decision of High May 8, 2018), http://www.iai.co.il/2013/14463- Court of Delhi, Feb. 5, 2007, New Delhi, http://www. 16100-en/BusinessAreas_NavalSystems_Barak1. delhidistrictcourts.nic.in/Feb07/CBI%20vS.%20 aspx. SURESH%20NANDA.pdf.

Page 22 ARMS TRADE CORRUPTION AND POLITICAL FINANCE the CBI was forced to drop the investigation helicopter offered by AgustaWestland81 to in 2013 for lack of conclusive proof.79 compete, while other changes to the specifications ultimately allowed the AW-101 to defeat its only If the Tehelka tapes are credible, the pattern of competitor, the Sikorsky S-92. The subsequent bribes in this case go beyond tightly targeted corruption investigation suggested that bribes offerings to Fernandes, the key decision-maker in were paid to Indian officials to manipulate the the deal. Notably, the Samata Party was not even tender requirements to this end. An audit of the in control of the government at the time, serving procurement process found numerous flaws in only as a junior member of a broad coalition. the procedure, including a failure to check the Nanda was obliged to include officials—Jain reasonableness of the price, and a requirement and Jaitly—beyond Fernandes in the scheme for twelve helicopters to replace eight, with no due to their positions of importance in the party justification for why four extra were needed.82 structure. An even more explicit demonstration of this principle is visible in the VVIP (very, very India finally signed a contract with important persons) helicopter scam, in which AgustaWestland in 2010, to buy twelve AW- the middlemen allocated funds explicitly to 101s for EUR 556 million.83 The Italian Attorney the military, bureaucrats, and key politicians. General’s office started investigating the deal in 2011.84 News of the investigation was made In 1999, India identified a need for new VVIP public in February 2012, and the Indian Defence helicopters to replace its existing Soviet Mi-8 Minister A.K. Anthony ordered a CBI probe helicopters, which were coming to the end the next day. Evidence eventually submitted of their service life and lacked high altitude in Italian courts suggest that AgustaWestland and night flying capabilities necessary for paid EUR 51 million to Indian air force officers, transporting national leaders to locations bureaucrats, and politicians, and possibly to in the Himalayas. The new tender, issued Italian politicians. The bribes were paid through in 2002, specified a 6,000-meter altitude three middlemen, Christian Michel, Guido requirement for the helicopters. The original tender was cancelled, however, on the grounds that it had only attracted a single bid, leading 81 AgustaWestland was formed in 2000 from a to a single-source competition.80 A revised merger between the Italian and British helicopter tender issued in 2006 reduced the altitude makers, Agusta and Westland Helicopters. Initially a requirement to 4,500 meters, insufficient joint venture between their Italian and British parent for many of the Himalayan tasks envisioned. companies, AgustaWestland became a wholly-owned subsidiary of Finmeccanica (now Leonardo) in 2004. This change enabled the AW-101 Merlin It continues to produce helicopters in both the UK and Italy. 79 Neeraj Chauhan, “CBI closes Barak scandal case for lack of evidence,” The Times of India (online), 82 Comptroller and Auditor General of India, “Re- Dec. 11, 2013, http://timesofIndia.Indiatimes.com/ port of the Comptroller and Auditor General of India India/CBI-closes-Barak-scandal-case-for-lack-of-evi- on Acquisition of helicopters for VVIPs.” dence/articleshow/27199226.cms. 83 Sushant Singh, “Explaining the VVIP chopper 80 Comptroller and Auditor General of India, row that has rocked Parliament,” The Indian Express “Report of the Comptroller and Auditor General of (online), Dec. 9, 2016, http://Indianexpress.com/ India on Acquisition of helicopters for VVIPs,” Report article/explained/agusta-westland-vvip-helicopter- No. 10 of 2013, Aug. 13, 2013, http://www.cag.gov. deal-behind-the-moving-parts-2773448. in/sites/default/files/audit_report_files/Union_De- 84 Singh, “Explaining the VVIP chopper row that fence_Compliance_Report_10_2013.pdf. has rocked Parliament.”

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Haschke, and Carlo Gerosa, using a complex along with Michel, Haschke, and Gerosa. network of accounts and shell companies. The Indian investigation, however, has to Former Indian Air Force head Air Chief Marshall address the politically charged question of S. P. Tyagi was specifically identified by the whether other bribe beneficiaries remain Italian Appeals Court as the likely recipient of unidentified. According to a note produced USD 11 million in commissions, some of which as evidence in the Italian trials from Michel to was paid through three of his cousins. As a Peter Hullett, head of AgustaWestland India, result of the corruption allegations, the Indian the latter was advised to target persons close government cancelled the contract in 2013, to Sonia Gandhi, leader of the Congress Party, and was later able to successfully recover EUR including Manmohan Singh, the prime minister 228 million already transferred for the three at the time.89 The note describes a break-down helicopters so far delivered.85 Giuseppe Orsi, the of a possible distribution of bribes: EUR 6 head of Finmeccanica, and Bruno Spagnolini, million for “AF” (air force), EUR 8.4 million CEO at AgustaWestland, were convicted for “BUR” (bureaucrats), EUR 6 million for by Italian courts on corruption and money “POL” (politicians), and EUR 3 million for “AP,” laundering counts in 2016, but these convictions which may refer to Ahmed Patel, Sonia Gandhi’s were overturned on appeal.86 Finmeccanica, as political secretary. It remains unclear whether the parent company of AgustaWestland, agreed this distribution of bribes was ever effected, and to a EUR 7.5 million fine in 2014 as well.87 whether the abbreviations have been properly interpreted. If the Michel-Hullett note does bear In India, criminal charges against Orsi and prosecutorial fruit, however, it may be one of Spagnolini have been filed as well, alongside the most clear-cut cases of bribes to sinecured charges against suspected bribe-takers Tyagi officials in the compendium. The distribution of and Air Marshall (retd.) J.S. Gujral.88 Two monies to positions that had no direct influence Indian middlemen, Tyagi’s cousin Sanjeev Tyagi, on the tender process suggest that corruption and lawyer Gautam Khaitan, were also indicted, functioned as a matter of due-regard for high 85 Tom Kington, “India Helo Bid Costs Finmecca- officials, rather than purely instrumentally. nica $309M,” Defense News, June 16, 2014, accessed through LexisNexis. The South African arms deal: 86 “Finmeccanica’s ex-CEO sentenced to 4-1/2 building a political coalition years in jail in bribery case,” Reuters, Apr. 7, 2016, http://www.reuters.com/article/us-finmeccanica-In- The South African Arms Deal,90 a USD 5 billion dia-court-idUSKCN0X428L. package signed in 1999 during the midst of an 87 Manu Pubby, “VVIP Chopper scam: Finmecca- electoral campaign, was a singular event in the nica to pay Rs 60 crore fine to Italian government,” India Today (online), Aug. 27, 2014, http://India- 89 “Sonia Gandhi, PM tainted by chopper scam as today.intoday.in/story/vvip-chopper-scam-finmec- note reveals Agusta was advised to target top leaders canica-to-pay-rs-60-crore-fine-to-italian-govern- to win contract,” India Today (online), Feb. 2, 2014, ment/1/379402.html. http://Indiatoday.intoday.in/story/agustawest- 88 Ananya Bhardwaj, “CBI files 30,000 page land-vvip-chopper-scam-note-sonia-gandhi-manmo- chargesheet in AgustaWestland chopper scandal,” han-singh/1/341261.html. The Print (online), Sep. 1, 2017, https://theprint.in/ 90 “The South African Arms Deal,” Compendium governance/cbi-files-30000-page-chargesheet-agust- of Arms Trade Corruption, World Peace Foundation, awestland-chopper-scandal/8996. sites.tufts.edu/corruptarmsdeals.

Page 24 ARMS TRADE CORRUPTION AND POLITICAL FINANCE politics of the post- nation. Not only In total, it is estimated that USD 300 million does it dwarf all previous and subsequent South were paid in bribes to a variety of individuals in African arms purchases—in a country where South Africa, including GBP 115 million (about annual total military spending is only around USD 185 million) by BAE Systems. Bribes were USD 3-3.5 billion—but the corruption associated also paid by French company Thomson-CSF with the deal, and the efforts to cover it up were (now Thales), which made the combat systems profoundly damaging to the young democracy. for the frigates, Thyssen Krupp, Ferrostaal (part of the consortium for the submarines and The corruption in the South African arms deal frigates), and Saab. Recently, corruption charges includes many elements, including direct party against former South African President Jacob funding and bribes to top politicians, but the wide Zuma—who was Vice President at the time of dispersal of bribes indicates a further motivation, the deal, which were dropped shortly before of creating a political coalition to support what he became President, have been reinstated. would otherwise have been a highly unpopular He faces 16 charges of fraud, racketeering, deal—and which was still highly controversial. corruption, and money laundering, in relation The Arms Deal was in fact a package of several to 783 corrupt acts related to the deal.93 deals: advanced Gripen combat aircraft and Hawk Recipients, or alleged recipients, of the bribes trainer/light attack aircraft from a consortium included: President ; Vice President of BAE Systems and Saab; submarines and ; Defense Minister Joe Modise; frigates from a consortium led by ThyssenKrupp ANC Chief Whip , and other of Germany; and helicopters from Agusta of parliamentarians; Jacob Zuma’s advisor Shabir Italy. The corruption associated with the deals Shaik (the last two being the only people so far served several purposes: motivating such a huge convicted in relation to the deal); his brother expenditure on grossly excessive equipment Chippy Shaik, head of procurement in the in the first place; manipulating selection Department of Defense; Moses Masikeyo, former processes in favor of the preferred bidders by head of the South African Metal Workers’ Union, those receiving bribes; and building a political Numsa, as well as other Numsa officials; Siphiwe coalition of support for the deal to overcome Nyanda, head of the South Africa National Defence the likely objections to the cost of the deal. Forces (SANDF) at the time; and the ANC itself. The controversies surrounding the deal, and It is likely that the full list is considerably longer. the corruption associated with it, are covered The payments to the ANC political party allegedly in depth by Andrew Feinstein, the former ANC helped fund their 1999 election campaign, and MP whose political career was ended by his additional payments to ANC officers such as party bosses over his attempts to investigate ANC Chief Whip Tony Yengeni bought their the deal, in two books, After the Party, and support, or at least acquiescence, for the deal, Shadow World.91 The case is also summarized in parliament. Feinstein recalls how, as he was in the Compendium of Arms Trade corruption.92

91 Feinstein, The Shadow World, Ch. 9, and An- can-arms-deal. drew Feinstein, After the Party: Corruption the ANC 93 Alexander Winning, “South Africa hits fallen and South Africa’s uncertain future (London: Verso, Zuma with arms deal corruption charges,” Reu- 2010). ters, Mar. 16, 2018, https://www.reuters.com/ 92 “The South African Arms Deal,” World Peace article/us-sAfrica-politics/south-Africa-hits-fall- Foundation website, May 5, 2017, https://sites.tufts. en-zuma-with-arms-deal-corruption-charges- edu/corruptarmsdeals/2017/05/05/the-south-Afri- idUSKCN1GS11X.

Page 25 ARMS TRADE CORRUPTION AND POLITICAL FINANCE trying to pursue his investigations in the face to back the deal, while their leaders were given of strenuous opposition from the leadership, sweeteners in return for their support—and being told by a colleague “this was a battle their silence when promised offsets did not pan [he] could not win, that the party would close out. One such project was the creation of a new ranks around the deal because [it] had received industrial school promised by Saab, which was money from the successful bidders which was supposedly intended to raise competence levels used to fund our election campaign”.94 Andrew and employability for black workers. This project Feinstein believes that payments to the ANC was one of those that was key to winning NUMSA’s may have ran to tens of millions of dollars.95 support. However, this proved to be a ‘bait and switch’; the new industrial school was never However, the wide distribution of the arms built, and instead, Saab invested in an existing companies’ largesse, including to people like college with close links to the defense industry trade union officials who had no formal role and the military. As recently as April 2018, a in the decision process, demonstrates another long-standing Saab consultant in South Africa, purpose behind the corruption, namely to build Erik Larsson, revealed that he personally ensured a political coalition in favor of an unpopular that bribes were subsequently paid to a variety deal. With many questions asked about the cost, of NUMSA officials to sooth their objections to in the face of the urgent needs of the majority the failure of the industrial school project.96 black population for housing, health care (in particular the AIDS crisis), education, and other In the South African case, the need for a social spending, securing support from the trade broad political coalition to support the arms union movement and other key civil society deal meant that corruption not only directly bodies, was also crucial. A large part of this was funded regular campaign activities, but also the through the massive offsets package associated coalition-building necessary to create political with the deal, which promised to bring tens of elite consensus, and wider societal support for thousands of jobs to South Africa. The offsets, or at least toleration of the deal. We can identify supposedly worth several times the deal’s value, ‘primary’ and ‘secondary’ circles of corruption. were massively inflated by offset accounting The ANC needed funding for its own routine tricks that bordered on the fraudulent; many finances (for example, retirement benefits for of the proposed offset investments never came aging cadres) and for the election campaign, to pass; and the number of jobs created was providing a ‘primary’ motivation for the deal. Top far fewer than promised, and largely directed politicians were also able to cash in as part of this toward highly skilled, disproportionately white primary circles of bribes. But securing support workers in the defense sector. The offsets for the deal required a larger, ‘secondary’ circle also served as a key means of corruption in of bribes to trade unions, parliamentarians, the deal, by directing offset investments to aides and officials, creating a snowballing friends and allies of the decision-makers. logic to the corruption behind the deal.

The offsets gave politically powerful trade unions such as the National Union of Metalworkers of South Africa (NUMSA) the cover they needed

96 Jonas Gummeson, “Konsult: Saab mutade fack- 94 Feinstein, The Shadow World, p. 181. et för att dölja brutet löfte” [Consultant: Saab bribed 95 Comments at World Peace Foundation work- trade union to cover up broken promise], Svenska shop on Global Arms and Corruption, London School Dagbladet (online), Apr. 24, 2018, https://www.svd. of Economics, 4-5 June 2018. se/saab-mutade-facket--och-svek-lofte-till-mandela.

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5. THE SPECIAL CASE OF non-transparent financial flows established RETRO-COMMISSIONS to implement the primary commissions, and/or through arrangements with the Normally, in the arms trade as well as other corrupted recipients in the buyer country, industries, sellers bribe buyers to win a contract. especially where the latter offers high levels of In several cases collected in the Arms Trade opacity in its political and financial dealings. Compendium, however, companies paid bribes to politicians in the exporting country (often Retro-commissions may also be paid to top in addition to the regular bribes to decision- executives of the exporting company, and French makers in the buyer countries) – so-called investigative journalist Jean Guisnel reports that 97 “retro-commissions.” Retro-commissions may this was a common practice. However, retro- be earmarked within the overall commission commissions are generally an area where the close package paid to the agents for distribution to political connections to the arms trade are critical the ultimate bribe recipients, or they may be – it is the fact that politicians have influence tacked on to the deal as a separate flow of funds. in deciding whether controversial exports Retro-commissions appear to have a particularly should go ahead, and over the conduct of state- strong connection to political finance. controlled arms companies, that makes many such retro-commissions possible. Therefore, Why would companies pay bribes to decision- it is unsurprising that this phenomenon tends makers in the seller countries? Unlike bribes to be so closely linked to political finance. to the buyer countries, these cannot generally be recouped via a mark-up in the price to the It is worth noting that all the retro-commission customer, nor do they obviously help win the deal. cases discussed here come from the 1980s and Several reasons emerge in the cases considered: 1990s, before the countries concerned (France and Germany) signed the OECD Convention • To overcome political objections to an export, on Bribery.98 Before this, bribery of foreign including relaxing or creating an exception officials was not only legal in these countries to export control policies and practice; (as in the UK), but treated as a tax-deductible business expense. In France, these bribes were • To gain political cover for a deal of dubious referred to by the coy phrase frais commerceiaux legality, where the sale may be prohibited by a exceptionels (“exceptional commercial UN embargo or national legislation, ensuring that regulatory authorities turn a blind eye; 97 This would most likely be a matter of personal • In the cases involving French naval producer enrichment, rather than political finance, and thus DCN (recently renamed ), is not the immediate concern of this paper. See Jean because the company is state-owned Guisnel, Armes de Corruption Massive: Secrets and thus subject to political direction, et Combines des Marchands de Canons (Paris: Le this provides an easy opportunity for Découverte, 2011). political actors to arrange bribes. The 98 The OECD Convention on Combating Bribery company is thus not an independent actor of Foreign Public Officials in International Business seeking its own best financial interests. Transactions, which was signed in 1997 and entered For the politicians concerned, retro-commissions into force in 1999, required all signatories to crimi- on arms deals provide an ideal means for nalize the bribery of foreign public officials, and was establishing an off-the-books, and possibly subsequently implemented in the national legislation offshore, political fund, under the cover of the of all OECD member states. http://www.oecd.org/ corruption/oecdantibriberyconvention.htm.

Page 27 ARMS TRADE CORRUPTION AND POLITICAL FINANCE expenses”), and in Germany as “nützliche The rest of this section describes a number Ausgaben” (“useful expenditures”). Thus, the of key cases of French retro-commissions, in regular commissions to decision-makers in the particular L’affaire Karachi and Angolagate. customer country could be made, if not exactly It also lays out the CDU party funding public, at least an open and regular part of the scandal in Germany, which resembled the deal, not raising suspicions in the seller country. retro-commission cases in some respects. Retro-commissions—which remained illegal as they involved bribery of domestic politicians, or abuse of state or commercial assets for The French Retro-Commission private gain—could then be disguised as part Cases of the permitted commissions. Because bribes are almost always illegal in the buying country, France has seen numerous political finance commissions are typically paid via agents and scandals, including several linked to arms using a difficult-to-trace network of financial sales, over the years. Two important factors intermediaries. As this system has already contribute to the prevalence of such cases. been created to mask the funds, it is possible – First and foremost, France has very restrictive although risky – to hide a portion of the funds political party and election finance laws. destined to return back to the seller country Donations to election campaigns and political within the overall labyrinth of financial flows. parties by foreign individuals and entities, and Retro-commissions associated with arms deals by (domestic or foreign) corporations and trade can be seen as part of a broader phenomenon— unions, are banned. Individual donations to albeit one that is extremely opaque and where only political parties are capped, currently at EUR a handful of cases come to light—of the recycling 7,500 a year, while donations to individual of portions of corrupt financial flows between candidates (for example in presidential election developing and developed world countries to campaigns) are capped at EUR 4,600 per election. the benefit of developed world politicians. In Spending on parliamentary elections is capped this context, arms deals may form just one part per parliamentary constituency, while total of a wider relationship between politicians in spending per candidate in presidential elections the countries concerned. The most recent high is capped at EUR 16.8 million in the first round, profile example of this is the current criminal and EUR 21.8 million in the second-round run- 101 investigation into former French President off. By contrast, Hillary Clinton spent USD , accused of accepting EUR 50 1.2 billion (EUR 1.09 billion) during the 2016 million in illegal campaign funding from former US Presidential election, and Donald Trump Libyan dictator Muammar Gaddafi.99 Similarly, Gabonais dictator Omar Bongo allegedly provided graph, June 11, 2009. funds for French presidential campaigns.100 https://www.telegraph.co.uk/news/worldnews/ europe/France/5498392/Late-Gabon-Presi- 99 Fabrice Arfi and Karl Laske, “Argent libyen: dent-Omar-Bongo-funded-Jacques-Chirac-presiden- Sarkozy est mis en examen pour corruption” [Libyan tial-campaign.html money: Sarkozy is placed under investigation for cor- 101 International Institute for Democracy and Elec- ruption], Mediapart (online), Mar. 23, 2018, https:// toral Assistance, “Political Finance Database,” and www.mediapart.fr/journal/international/210318/ Andreas Becker, “French elections: Who finances the argent-libyen-sarkozy-mis-en-examen. candidates?” Deutsche Welle (online), May 5, 2017, 100 ‘Late Gabon President Omar Bongo ‘funded’ http://www.dw.com/en/french-elections-who-fi- presidential campaign,’ The Tele- nances-the-candidates/a-38704682.

Page 28 ARMS TRADE CORRUPTION AND POLITICAL FINANCE spent USD 647 million (EUR 588 million).102 French arms export agencies, SOFRESA (now ODAS), SOFMA, OGA, OFEMA, and SOFREMI State funding is provided to political parties held mandates to actively promote French arms based on their share of the vote and number exports in the 1990s, and were responsible in of elected representatives from previous many cases for the payment of commissions— elections, while half of the campaign expenses legal at the time—in connection with deals.104 of presidential candidates who secure at least 5% of the vote is reimbursed by the state. Thus, French politicians responsible for arms Candidates frequently take out bank loans exports, in particular the minister of defense, to finance their campaigns in advance.103 had very close connections to all the key French actors in arms deals, creating clear opportunities The strict spending and finance limits, while to exploit the deals for political gain. reducing the influence of corporate interests and rich individuals, creates a strong incentive for These factors combined to create a perfect candidates to hide or mask additional sources storm during the 1995 Presidential election of funding to get around these restrictions. campaign, in which the leading center-right This may be particularly true for presidential party, the Rassemblement pour la République elections, where, in the first round, multiple (RPR), was divided between its president, candidates may stand from the same political Jacques Chirac (the ultimate election winner), party, thereby nullifying those political parties and Prime Minister Edouard Balladur. The as a source of funding. Alternatively, rival latter’s campaign came under strong suspicions candidates from the same party may compete of receiving large retro-commissions connected in primary elections, again relying only on to major arms deals. Balladur was placed their own individual campaign finance. under formal investigation over his campaign finances in May 2017 by the Cour de Justice Second, there exists a very close relationship de la République, which prosecutes alleged between the French state, the arms industry, crimes committed by government ministers and trade policy. While this may be true to a in the course of their duties.105 The long delay considerable degree in many major producers, a is an indication of the slowness with which number of factors are particular to France. First, the wheels of justice often grind in such highly some major arms companies are state owned; political and complex financial corruption cases. of note is shipbuilder Naval Group (formerly DCN, later DCNS), at the center of a number of retro-commissions cases. Electronics company Thomson-CSF was also state-owned until its 104 “Les cinq sociétés françaises de commercializa- privatization in 1999 under its new name of tion” [The Five French Business Promotion Compa- Thales, as was Aérospatiale until its merger into nies], Les Echos (online), June 5, 1992, https://www. EADS (now Airbus) in 2001, in which the French lesechos.fr/05/06/1992/LesEchos/16153-051-ECH_ state still holds a stake. In addition, the competing les-cinq-societes-francaises-de-commercialisation. 102 Bill Allison, Mira Rojanasakul, Brittany Harris, htm. and Ceedric Sam, “Tracking the 2016 Presidential 105 “Edouard Balladur mis en examen dans l’af- money race,” Bloomberg, Dec. 9, 2016, https://www. faire Karachi” [Edouard Balladur placed under inves- bloomberg.com/politics/graphics/2016-presiden- tigation in the Karachi affair], Le Parisien (online), tial-campaign-fundraising/ May 30, 2017, http://www.leparisien.fr/faits-divers/ 103 Becker, “French elections: Who finances the edouard-balladur-mis-en-examen-dans-l-affaire-ka- candidates?” rachi-30-05-2017-6998652.php.

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L’affaire Karachi and the Sawari II as a result of the investigation in Pakistan, contract and eventually pleaded guilty to receiving kickbacks in relation to this and other deals. It The two biggest deals associated with is likely, however, that politicians close to then- allegations of retro-commissions benefitting Prime Minister —in particular the Balladur campaign are the sale of Agosta her husband, , nicknamed submarines to Pakistan, and of Lafayette “mister 10%”—were among the recipients.109 frigates to Saudi Arabia, both by DCN in 1994 (the Agosta and Sawari II contracts).106 This was standard practice—legal in France, though not in Pakistan. The twist in the tale The retro-commission allegations came to light came when, not long before the signing of in 2002 due to an apparent terrorist attack in the Agosta contract—as well as the Sawari II Karachi, Pakistan, in which a car bomb killed contract with Saudi Arabia—Renaud Donnedieu 14 people, including 11 French employees de Vabres, special advisor to French Minister of DCN working on the construction of one of Defense Francois Léotard, a close ally of of the submarines in Pakistan. While initial Balladur, insisted on the hiring of two additional investigations focused on Al Qaeda as a likely agents by DCN, Franco-Lebanese businessman suspect, attention subsequently fell on the large Ziad Takieddine and Abdul Rahman el-Assir. commissions associated with the submarine An additional 4% in commissions, worth around deal. A French judicial inquiry, entitled Nautilus, EUR 33 million, was to be paid on the Agosta produced a report in 2002 suggesting that the deal via these two agents, as well as at least car bombing in Karachi was the work of senior EUR 30.5 million on the Sawari II contract. Pakistani officials aggrieved at the cancellation of the commission payments by the new This was highly unusual, as the additional French President Jacques Chirac after he took commissions served no obvious purpose in office in 1995.107 This theory has never been winning a contract that was already close substantiated, but it was the Nautilus inquiry that to being in the bag. Emmanuelle Aris, then led to the discovery of the retro-commissions, DCN’s head of international affairs, told for which the evidence is much clearer.108 French investigative journalist Jean Guisnel, that he was used to hearing from numerous The main commissions, worth 6.25% of the such “emergency victory consultants” offering EUR 825 million contract, were to be paid to their services in similar circumstances, and political and military recipients in Pakistan, would usually dismiss them out of hand.110 via various agents, by the French arms These two, however, were sent directly at the export agency SOFMA (société française de behest of the Ministry of Defence. It is these matériels d’armement). Former Naval Chief additional, apparently superfluous commissions, of Staff Admiral Mansur al Haq was sacked which were allegedly used to funnel retro- commissions to Balladur’s election campaign. 106 These cases are covered together in the Compendium as L’affaire Karachi. “L’affaire -Ka A further plot twist came when, contrary to rachi,” World Peace Foundation, website, May expectations, Balladur was knocked out in the 5, 2017, https://sites.tufts.edu/corruptarms- first round of the 1995 election, and his RPR deals/2017/05/05/laffaire-karachi. rival Chirac went on to win the second round against Socialist Lionel Jospin, becoming 107 The full Nautilus report is available at https:// www.frenchleaks.fr/Le-rapport-Nautilus,10.html. 109 Guisnel, Armes de Corruption Massive. 108 Guisnel, Armes de Corruption Massive, Ch. 4. 110 Guisnel, Armes de Corruption Massive, Ch. 4.

Page 30 ARMS TRADE CORRUPTION AND POLITICAL FINANCE president. When Chirac looked into the securing the sale of the submarines and frigates, Agosta and Sawari II contracts, suspecting the but rather were a means of embezzling funds involvement of retro-commissions to illicitly from DCN—and therefore ultimately the French fund his rival’s campaign, he ordered a halt to taxpayer—for French political purposes. One act the commission payments. But for the Karachi of “legitimate” corruption, ironically, was used as attack, this might have been the end of the story. cover for a second “illegitimate” act of corruption.

Apart from the Nautilus inquiry, the allegations of retro-commissions were supported by an Other cases internal Ministry of Defense investigation by Several other French arms deals have involved the Comptroller General of the Armed Forces allegations of retro-commissions. Between Jean-Louis Porchier in 1997; kept secret at the 1982 and 1986, French company Luchaire sold time, the report was leaked to journalists in 450,000 artillery shells to Iran—then under 2007. Another remarkable document discovered embargo by France during the Iran-Iraq war, in 2008 was a memo by former DCN Finance with France extensively arming Iraq—using Director Gérard-Philippe Menayas, which fake end-user certificates. Defense Minister stated that, between 1991 and 2002, DCN sold Charles Hernu was warned by the director of “around 60 billion Francs [EUR 9.15 billion] the Direction générale de la sécurité extérieure worth of equipment. Of this sum, 8-10%, that is (DGSE, General Directorate of External Security) 5-6 billion Francs [EUR 732-915 million], was that the deliveries were taking place, but dispersed in frais commerceiaux exceptionels turned a blind eye. A report by the Comptroller to agents or lobbyists charged with their General of the armed forces, declassified redistribution to the ultimate beneficiaries.” in 1987, alleged moreover that members of Moreover, the memo discusses the establishment Hernu’s ministerial cabinet actively covered of shell companies in Luxembourg that were for Luchaire’s illicit exports, in return for used as conduits for the commissions, including donations of around EUR 457,000 to the ruling one, Heine, that was used by Takieddine and Socialist Party.112 An investigative magistrate, el-Assir for the 11th hour extra commissions. A however, did not find sufficient evidence to bring 2007 note from the French Interior Ministry’s charges, and the case was dismissed in 1989. Division Nationale des Investigations The sale of Lafayette frigates to Taiwan in 1991, Financières (National Financial Investigations which involved around USD 500 million in Division) comments on the information in total bribes to Chinese and Taiwanese officials, Menayas’ memo: “It thus becomes apparent for which France eventually was ordered to pay that the creation of the Heine company in the EUR 630 million in compensation to Taiwan second half of 1994 occurred after the approval in 2011, was also associated with allegations of Nicolas Bazire, Director of the Cabinet of of retro-commissions.113 Selling major arms to Prime Minister Édouard Balladur, and of Taiwan was politically sensitive and contrary to Budget Minister Nicolas Sarkozy, and is linked French policy due to the damage it would cause to the financing of the electoral campaign of Mr. to relations with China—a factor the USD 100 Balladur for the 1995 Presidential election”.111 112 Guisnel, Armes de Corruption Massive, Ch. 7. If these allegations are correct, the EUR 33 million in commissions paid through Takieddine 113 “Taiwan – The Lafayette Affair,” World Peace and el-Assir may have had little to do with Foundation, website, May 5, 2017, https://sites.tufts. edu\corruptarmsdeals\2017\05\05\Taiwan-the-la- 111 Guisnel, Armes de Corruption Massive, Ch. 4. fayette-affair.

Page 31 ARMS TRADE CORRUPTION AND POLITICAL FINANCE million in bribes to Chinese officials was meant Pierre Falcone and Arkady Gaydamak, through to overcome. The bribes were paid via state- their front company Brenco. A connection owned oil company Elf Aquitaine, later revealed between the arms dealers and the Angolan in a major scandal to have been used for years government was established by highly placed as a for bribes to both French and members of the French political establishment, foreign politicians and officials. Foreign Minister including Jean-Christophe Mitterand, son of the Roland Dumas was accused of receiving bribes French president, and Interior Minister Charles in return for softening political opposition to Pasqua. The deals involved huge commissions— the deal. Dumas was initially convicted, but as much as 50% of the value of the deal—to the two later acquitted on appeal. Strong suspicions brokers, who used the money to bribe politicians, of retro-commissions associated with the deal officials, and officers in both Angola and France. remained, but the investigation into this case was This series of deals, of dubious legality, received closed down in 2008 due to a lack of evidence. extensive political support and cover from large Guisnel suggests that lack of evidence is a parts of the French political and governmental common challenge in investigating retro- establishment—in many cases in return for commission cases because, even more so than in bribes (proven or suspected). Falcone and regular foreign bribery cases, very little paper trail Gaydamak were recommended to the Angolan is left. Agreements are made with a handshake, government in a letter from Pasqua, and Falcone and money is frequently paid in cash. Politicians’ obtained a privileged position as an agent for proximity to the export decision-making process one of the French export agencies, SOFREMI gives them much more assurance that bargains (société française d’exportation du ministère will be kept, at least compared with cases de l’Intérieur). Support from the French where an agent is employed to channel bribes establishment also facilitated the creation of a overseas. In those more typical cases, bank network of shell companies and offshore accounts transactions must be made, and subsequently used to launder the dirty money from the affair.115 hidden within webs of shell companies and In all, 36 individuals were convicted in a French accounts in non-transparent jurisdictions. court in 2009 in connection with the Angolagate affair, including politicians, military officers, businessmen, lawyers, government officials Angolagate and advisors, and even a writer. These included Probably the biggest French arms sales scandal Falcone, Gaydamak (in absentia, having fled in the 1990s, however, was Angolagate, a case to Israel where he had citizenship), Pasqua, involving many dubious or illegal features, of Jean-Christophe Mitterand, and Jean-Charles which alleged retro-commissions were only Marchiani, a senior advisor to Pasqua who one.114 The scandal involved the sale of USD acted as a key intermediary between the arms 790 million worth of arms to Angola between dealers and the Angolan government. Pasqua 1993 and 1998, during the civil war, and in was, however, subsequently acquitted on appeal; contravention of French arms export laws. The while he was shown to have received a donation arms were sourced from Eastern Europe, but of EUR 228,000 from Brenco towards his brokered from France by arms dealers Jean- European parliament election campaign in 1999, no clear link could be established between this

114 “Angolagate,” World Peace Foundation, payment and the support he provided to Falcone. website, May 5, 2017, https://sites.tufts.edu/cor- ruptarmsdeals/2017/05/05/angolagate. 115 Guisnel, Armes de Corruption Massive, Ch. 7.

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Pasqua was, over the course of his political government for support to build an armored career, the subject of numerous criminal vehicles plant in the province of Nova Scotia, in investigations relating to illicit political finance, an area called Bear Head.118 Thyssen-Henschel but was only ultimately convicted (after appeal) wanted both to sell vehicles to the Canadian in two such cases—one involving the sale of armed forces and to circumvent Germany’s strict a casino, the second involving another case export regulations; the company sought from the of retro-commissions, associated with sales Canadian government a five-year export license of internal security equipment by SOFREMI, for sales to Algeria, Bahrain, Kuwait, Pakistan, during Pasqua’s tenure as interior minister Saudi Arabia, and the United Arab Emirates. (1993-95). Falcone was once again one of The firm’s pitch to the government of Prime the chief agents used by SOFREMI for the Minister Brian Mulroney, who represented a payment of commissions—regular and retro— constituency neighboring the proposed project, and beneficiaries included various figures close emphasized the potential to revitalize the to Pasqua, including his son Pierre-Philippe provincial economy. The project was never Pasqua, and Jean-Charles Marchiani. Charles approved despite support from Mulroney and Pasqua was convicted of complicity in the affair, local politicians due to opposition from the rather than as a recipient of bribes himself.116 defense and external affairs ministers, as well as their senior staff. Canada already produced armored vehicles, was not planning to purchase CDU Party Funding Scandal more in the short term, and the export licenses sought by Thyssen-Henschel challenged the The CDU party funding scandal was a far- Department of External Affairs’ traditional ranging affair involving many cases of reluctance to approve controversial arms sales. government corruption. While the scandal’s arms-related deals, both involving armored Nonetheless, over the course of a decade of vehicles manufacturer Thyssen-Henschel, unsuccessful advocacy for the deal, Thyssen- were relatively minor in monetary value, they Henschel paid DM 4 million to a middleman, produced allegations leading directly to the the German-Canadian Karlheinz Schreiber, who downfall of Hemlut Kohl and his successor, hired Canadian lobbyists and sought diplomatic Wolfgang Schäuble. In one important respect, support from the German government. In October the Thyssen-Henschel deals resembled the 1994, Schreiber passed DM 100,000 to Brigitte French retro-commission scandals: politicians Baumeister, CDU treasurer, as a donation for the in the exporting country were as much the target party, during a period when he was continuing to of bribes as those in the importing country. lobby for the deal. Baumeister later testified that she handed the sum to Wolfgang Schäuble, then In around 1985, the German firm Thyssen- serving as the leader of the parliamentary CDU Henschel117 began lobbying the Canadian faction, but the sum was never booked into official CDU accounts. At the time, German campaign 116 “Charles Pasqua condamné à un an de prison finance law required that donations worth more avec sursis” [Charles Pasqua sentenced to a sus- than DM 20,000 had to be declared.119 Mulroney pended one-year prison term], (online), Apr. 30, 2010, http://www.lemonde.fr/societe/arti- part of Rheinmetall. cle/2010/04/30/charles-pasqua-condamne-a-un-an- 118 The timeline and narrative produced here is de-prison-avec-sursis_1345326_3224.html. drawn largely from Cameron and Cashore, The Last 117 Thyssen-Henschel was at the time a subsidiary Amigo. of the Thyssen Industrie conglomerate, but is now 119 This transaction was revealed by Schreiber

Page 33 ARMS TRADE CORRUPTION AND POLITICAL FINANCE was never tried, even though a Canadian public brought Schreiber into the deal to lobby the inquiry found he had acted inappropriately in deputy minister of defense in charge of arms taking CAD 225,000 in cash from Schreiber in exports, Ludwig Holger Pfahls. Pfahls’ support 1993, after leaving office, to lobby UN Security was deemed necessary to help overcome the Council members to buy Thyssen-Henschel arms embargo that Germany had traditionally products.120 Schreiber claimed both that the total maintained on the Middle East. Another fee was CAD 300,000 and that the arrangement middleman, Mansour Ojjeh, arranged for bribes had been made while Mulroney was still in office. to Saudi parties. In September 1990, Pfahls, Saudi representatives, and Thyssen-Henschel While the Bear Head project never got off the executives agreed to a DM 446 million deal, with ground, Thyssen-Henschel made good use of its DM 220 million earmarked for consulting fees, middlemen to secure a deal to sell similar armored for 36 armored vehicles (including 10 CBRN- vehicles to Saudi Arabia during the Persian capable vehicles) to be taken out of Germany Gulf War. Jürgen Massmann, an executive at army formations and transferred immediately Thyssen-Henschel, had already established by to Saudi Arabia.122 Thyssen-Henschel would the summer of 1990, during the build-up to the then manufacture replacements over time. Gulf War, that the Saudis were interested in the Fuchs armored vehicle, a variant of which can Despite encountering initial pushback from the operate under chemical, biological, radiological, German Ministry of Defense, which opposed or nuclear (CBRN) conditions.121 Massmann selling the military’s own vehicles, and from other ministers interested in preserving the in a January 2000 interview, leading to a series of embargo, Pfahls and Schreiber were able to win mutual recriminations between Baumeister and cabinet support for the deal in February 1991. Schäuble which ultimately cost the latter the chair- In August 1991, Schreiber handed over DM1 manship of the CDU. See “Q&A: Germany’s party million (EUR510,000) in cash to CDU Treasurer funding scandal,” BBC News (online), June 29, Walther Leisler Kiep (Baumeister’s predecessor), 2000, http://news.bbc.co.uk/2/hi/europe/610234. and Horst Weyrauch, a party tax advisor. The stm; Christoph Maria Fröhder, Hans Leyendecker, sum was deposited into an account in Frankfurt and Stephan Wels, “Lügen, tricksen , täuschen - Die and later dispensed to Kiep, Weyrauch, and Uwe verlogene Ehre des Walther Leissler Kiep” [Lies, Lüthje, another long-time party finance official. tricks, and deception – the false honor of Leissler Schreiber insisted that the sums were a donation Kiep], Das Erste – Norddeutscher Rundfunk (online), to the CDU.123 Kiep had played a role in the Saudi Aug. 30, 2001, https://daserste.ndr.de/panorama/ archiv/2001/Luegen-tricksen-taeuschen-Die-ver- eriger Beweis” [The same pattern, difficult to prove], logene-Ehre-des-Walther-Leissler-Kiep,erste7584. Süddeutsche Zeitung (online), May 19, 2010, http:// html; and Tony Czuczka, “Tearful Exchange in Ger- www.sueddeutsche.de/politik/prozess-gegen-thys- man Scandal,” The Washington Post (online), Aug. sen-manager-gleiches-muster-schwieriger-be- 29, 2000, http://www.washingtonpost.com/wp-srv/ weis-1.885147. aponline/20000829/aponline140006_000.htm. 122 Michael Hilbig, Wolfgang Stock, and Olaf 120 Les Whittington and Richard J. Brennan, “Bri- Wilke, “Schmiergeld Affäre: Schatten der Vergangen- an Mulroney acted inappropriately in accepting cash, heit” [The Bribery Affair: Shadow of the Past], Focus inquiry finds,” May 31, 2010, https://www.thestar. Magazin (online), No. 47, Nov. 22, 1999, https:// com/news/canada/2010/05/31/brian_mulroney_ www.focus.de/politik/deutschland/schmiergeld-af- acted_inappropriately_in_accepting_cash_inqui- faere-schatten-der-vergangenheit_aid_179097.html. ry_finds.html. 123 “Eine Million vom Waffenhändler - Die prom- 121 Hans Leyendecker, “Gleiches Muster, schwi- inentesten Namen in der Affäre und ihre möglichen

Page 34 ARMS TRADE CORRUPTION AND POLITICAL FINANCE deal; in early February 1991, Schreiber had as part of a patronage network, although there met with him to push for the export approval, is little that has been publicly reported that can which was forthcoming at the end of that month. put substance on this hypothesis. In Canada, Mulroney was retired, or nearing retirement, In both the Canadian and Saudi deals, the when he pocketed Schreiber’s bribe. However, commissions paid out by Thyssen-Henschel had Bavarian employees at Messerschmitt-Bölkow- a specific purpose. In the Canadian deal, it was Blohm, which had previously hired Schreiber as to convince the Canadian government not only a middleman on other Canadian deals, told their to support the Bear Head plant with promises colleagues in Canada that commissions on those of open export licenses, but also to buy armored older deals were involved in the 1984 Progressive- vehicles from the plant in future. In the Saudi Conservative Party’s leadership competition, deal, the bribes were specifically targeted toward which had brought Mulroney to power.124 loosening the German export restrictions to the Middle East. However, the Saudi deal also included payments that amounted to normalized The Future of Retro- profiteering; not only did the Saudi participants Commissions receive DM 220 million in kick-backs through Retro-commissions scandals were a recurring Ojjeh, Schreiber allegedly paid out kick-backs feature of French arms exports in the 1980s and to Max Strauss, son of long-time Bavarian 1990s, and also the source of a major scandal in leader Franz Josef Strauss. In both cases, it also Germany. Retro-commissions are a particularly appears that the bribes were first suggested by pernicious form of arms trade corruption, the selling company’s side, although the bribes to in that, in addition to subverting democratic unidentified Saudi beneficiaries are an exception. processes and election finance limits, which are The nexus between the German bribes and there to create a level playing field for political political finance seems fairly clear, even though competition, they are frequently used to provide some bribes clearly ended up in personal political cover for arms sales of dubious legality, accounts. Both the DM 1 million delivered to or to provide political incentives for arms Kiep and the DM 100,000 given to Baumeister exports that would otherwise not be permitted. were consciously handed over to party treasurers Moreover, deals involving retro-commissions and clearly intended to be political donations. almost always involve the more regular sort That they were not booked into party accounts of bribery of decision-makers in recipient is consistent with the pattern of off-budget countries as well; indeed, they have often been patronage funds controlled by Helmut Kohl conducted under the cover of such commissions. uncovered in the broader investigation into the Are retro-commissions still possible post- CDU’s internal finances. The Saudi bribes could OECD Convention? They are likely to be more be understood as rewards to powerful members difficult to arrange. While European companies of the government holding important sinecures still do—now illegally—pay bribes to decision-

Motive” [A million from the arms dealer – the 124 Specifically, the MBB executives claimed in most prominent names in the affair and their likely these internal communications that CSU money motives], Der Tagesspiegel (online), Nov. 22, 1999, had funded Brian Mulroney’s leadership campaign https://www.tagesspiegel.de/politik/eine-million- against Joe Clark, and that commissions from Airbus vom-waffenhaendler-die-prominentesten-namen- and MBB Helicopter deals in Canada were used in-der-affaere-und-ihre-moeglichen-motive/105766. to compensate the CSU afterward. Cameron and html. Cashore, The Last Amigo, pp. 129-130.

Page 35 ARMS TRADE CORRUPTION AND POLITICAL FINANCE makers in the buyer countries, it is no longer Moreover, an old friend shows up once again possible to enlist the direct involvement of in this latest tale: Ziad Takieddine, the French- state officials to arrange these, as was formerly Lebanese businessman who was the key agent the practice;125 rather, they must do so through in the Pakistan and Saudi retro-commissions their own network of shell companies and affair, has claimed that he personally delivered agents, independently of politicians. Meanwhile, suitcases full of Libyan money to Sarkozy. politicians cannot, as was the case for example in L’affaire Karachi, insist that the exporting company use particular agents they have enlisted, 6. CONCLUSIONS with a view to receiving retro-commissions. The possibility of companies seeking to bribe Major arms deals are, by their nature, intensely ministers to overcome political objections to a political affairs. Decisions are taken at the sale cannot be ruled out, but this could only be highest levels of government and are strongly done at greater risk to all concerned, lacking a influenced by relations between states. Where legal and state-sanctioned mechanism (the main deals are sufficiently large in relation to the commissions package) to disguise the payments. country’s economy or defense budget, they may also draw political interest and controversy Nonetheless, it would be premature to write beyond the innermost circles of government. an obituary for the phenomenon of retro- In this light, it is not surprising that politicians’ commissions, given the continuing insatiable personal and political interests—and the corrupt demand for political finance, licit or illicit, in pursuance of these interests—are often a factor. polities of all types. The Sarkozy Libyan case (see above) is a timely illustration of this. While The demand for funding for political activities is the allegations in this case do not concern retro- an important motivating factor for politicians to commissions, being instead an example of direct seek corrupt payments in general, arms-related bribery of a French politician by a foreign leader, or otherwise. Whether this is a more or less there is certainly an arms deal connection. important motivation than personal greed is a According to the allegations, Sarkozy, as interior moot point; clearly both are significant. However, minister, authorized the export of considerable the motivations, hence the patterns of payments, internal security technology to , following are tied to a country’s governance system: years of embargo. As president, Sarkozy sealed • In democracies—the primary focus of this numerous arms deals with Gaddafi (of which only paper—the major part of this political some were delivered, before the outbreak of war spending is for campaigns for elected in 2011), and also did much to rehabilitate the office, both to become a party’s candidate dictator’s image in the international community.126 and in general elections. In addition, 125 In fact, the UK Ministry of Defence already however, internal party competition and retreated from direct involvement in arranging patronage, not directly linked to e.g. bribes in the 1970s, preferring to leave the matter to primary campaigns, and general party companies to organize for themselves, while turning running costs may also be important. a studiously blind eye. Nicholas Gilby, Deception in • In authoritarian systems, political finance is High Places: A History of Bribery in Britain’s Arms Trade (London: Pluto Press, 2013). here is the proof], Mediapart (online), Apr. 4, 2018, 126 Fabrice Arfi and Karl Laske, “Nicolas Sarkozy https://www.mediapart.fr/journal/France/040418/ a bien servi les intérêts de Kadhafi. Voici les preuves” nicolas-sarkozy-bien-servi-les-interets-de-kadhafi- [Nicholas Sarkozy served Gaddafi’s interests well: voici-les-preuves.

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related less to elections (which are strictly finance perspective on arms trade corruption for show if they take place at all), and directs our attention to a larger pool of potential more for sustaining patronage networks. conspirators than a purely instrumental view.

• In partial democracies, activities such as vote Furthermore, whatever the original political buying, paying local enforcers, and buying the motivations for the corruption, once a corrupt loyalty of those responsible for conducting deal is in motion, it can generate secondary elections may involve significant costs. corruption requiring the further distribution of bribes; this can be to pay off potential ‘spoilers’, The arms business, due to its lack of transparency, to ensure loyalty among those who are not connection to political power, and special connected with the decision but who expect features such as offsets, lends itself particularly their cut, or (in the case of deals large enough well to the generation of such illicit, off-the-books to garner serious national attention, such as sources of political finance. The cases presented in South Africa) to build up a broader political in the Compendium of Arms Trade Corruption, in base of support for the deal. The need to cover particular those discussed in this paper, illustrate up corruption can generate not just further the importance of this link. Through these cases, financial corruption, but also subversion of and the framework introduced in this paper, political and judicial institutions and processes. we can make some preliminary observations about the nature of the connection between Second, the compendium’s case studies give political finance and the global arms trade, and some support to the hypothesis that intra- the patterns of distribution of corrupt payments. party competition can be a driver of corrupt activity. While only one of the cases, the French The first conclusion we can draw from this study retro-commissions scandal, can be linked helps us understand and predict the range of directly to a primary campaign, several more bribe-recipients in any case, and suggests why were connected to off-budget management bribes are paid out to some officials but not of internal party politics. More importantly, others. A purely instrumental, individual greed- payouts to a large networks of sinecured political motivated view of corruption would suggest that allies are a very common feature among the bribes should be paid primarily to key decision- case studies. Sometimes, these allies may not makers in the procurement process. While many even be supporters of the political decision- key decision-makers do take bribes, numerous makers, but rather protectors of the key cases suggest that the network of corrupt actors intermediaries involved in the deal; this would is often much more widespread. These networks describe the alleged relationship between Franz can be large for two reasons. In some cases, Josef Strauss of Bavaria and the Canadian- the key decision-makers have to bring in party German businessman Karlheinz Schreiber. officials in order to connect the bribe-giver with accounting experts who can render the monies The size of political parties seems irrelevant to legitimate enough to spend. Both the Belgian their susceptibility to corruption; dominant and German party funding scandals saw party political parties, such as the ANC in South treasurers playing a key role in organizing the Africa, can be tempted to use corrupt monies for transactions; in the Barak missile scandal, officials electoral expenses, while minor ones, such as of the Samata Party were key intermediaries. In the Samata Party in India, could parlay control other cases, the decision-makers feel obligated of the defense ministry into illicit profits. The to reward their political network with bribes to longevity of a democratic regime also seems allies occupying key sinecures. Thus, a political largely irrelevant, with both young (South

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Korea, Taiwan) and old (France, Germany) party activities. In some cases, it is known or democracies falling prey to scandals. It is suspected that senior politicians have received unclear whether the size of deals is important; large bribes (for example, Prince Bandar bin the compendium includes relatively small cases, Sultan in Saudi Arabia in the al Yamamah deals), such as the Belgian F-16 upgrades program, but but the uses to which this money was put, be also marquee once-in-a-generation contracts. they personal or political, is completely obscure.

Third, the role of intermediaries is directly tied The policy prescriptions for dealing with this to our understanding of who needs to be bribed type of arms trade corruption include many in the political system. While intermediaries are that are not substantially different from those essential actors in grand corruption schemes relating to other forms of arms trade (and other) because of their specialized knowledge in corruption: more transparent and accountable money laundering and related illicit white-collar budgetary and procurement processes, and techniques, an equally important role they can greater international financial transparency. play is providing the prospective bribe-giver A major focus currently in anti-corruption with a pre-existing knowledge of the power work, for example, is to ensure transparency in structure that needs to be corrupted. The re- “beneficial ownership”, that is make it possible to appearances of Ziad Takieddine in the French know who are the actual owners and beneficiaries cases, of Alfons Puelincxk in the two Belgian behind shell companies and other corporations. cases, of Count Alfons Mensdorff-Pouilly in the A significant step forward was the recent Austrian, Czech, and Hungarian deals, and of decision of the UK Parliament to require public Sudhir Choudhrie and other arms brokers in the registers of beneficial owners in UK Overseas Indian cases all support this theory. However, Territories, such as the British Virgin Islands.127 in the many cases where the bribes were Such measures are as relevant to arms trade and relatively centralized through a key decision- political finance corruption as to other areas. maker, the intermediaries’ role in identifying However, understanding the political finance the important power centers was essentially dimension adds another dimension of difficulty taken over by the political principals themselves. to the problem, in that the incentives for This report has primarily focused on political tolerating corruption run deeper than the greed corruption cases involving democracies – that of individual politicians and officials, to the is, either as the recipient country, or as the functioning of the political system itself. This supplier in cases involving retro-commissions. means that some of the key agents of scrutiny, (The recipients in some of the latter cases were such as parliament, may be compromised. Ruling not democracies in any sense). This does not parties, or key factions therein, may well seek to mean that political finance corruption is not prevent or obstruct investigation of corruption also a factor in more authoritarian countries; cases in which they are the political beneficiaries; rather that the nature of politics and political in contrast, if an individual minister has taken finance in these countries is likely to be more bribes purely for their own purposes, it may opaque and less subject to detailed scrutiny by suit the interests of the government to allow domestic media and investigative authorities.

Also, where electoral competition is less of a 127 D. Sabbagh, “‘Dirty money’: U-turn as Tories serious factor, political finance corruption is back plans to make tax havens transparent”, The more likely to relate to maintaining patronage Guardian, 1 May 2018, https://www.theguardian. networks in a political marketplace than in com/politics/2018/may/01/UK-to-introduce-pub- funding election campaigns and regular political lic-ownership-registers-for-overseas-territories.

Page 38 ARMS TRADE CORRUPTION AND POLITICAL FINANCE this individual to be held responsible. The of England, working mostly in the field of defence and South African case in particular provides the peace economics. He holds PhDs in Mathematics and clearest cautionary tale as to how a political Economics, and is the author of numerous publications establishment can close ranks to protect its own on defence and peace economics, development interests and stymie an investigation, and in economics, arms industry and trade, and mathematics. so doing undermining the proper functioning of the rule of law in a young democracy. Other related articles and This form of corruption not only poses a legal publications: and technical challenge, but a political one as well. Overcoming it requires sufficiently robust and independent judicial institutions, capable of Corruption in the Russian Defense Sector, by resisting the most powerful of political pressures. Polina Beliakova and Sam Perlo-Freeman It also calls for more intense scrutiny of the funding Corruption in the Indonesian arms business: and expenditure of parties and campaigns. This tentative steps towards an end to impunity, by in turn requires a powerful political will to adopt Xiaodon Liang and Sam Perlo-Freeman measures that will foreclose options for political financing, limiting the future funding options How Big is the International Arms Trade? by of both the reforming coalition and its rivals. Sam Perlo-Freeman

Xiaodon Liang is a Research Assistant at the Indefensible: Seven Myths that World Peace Foundation for the Global Arms Trade Sustain the Global Arms Trade, and Corruption project and a PhD student at The edited by Paul Holden Fletcher School of Law and Diplomacy. He previously worked at the National Bureau of Asian Research and Dealogic, an analytics firm. He holds a master’s degree from The Fletcher School and an undergraduate degree from the London School of Economics.

Dr. Samuel Perlo-Freeman is a Fellow at the World Peace Foundation, and Project Manager for the WPF project on Global Arms Business and Corruption. He was previously Senior Researcher at the Stockholm International Peace Research Institute (SIPRI). From 2007 to 2016 Sam worked at SIPRI on issues of military expenditure, arms industry and arms trade, and in particular was head of the SIPRI Military Expenditure project from 2009 to 2016. In this capacity, he recently completed a project to extend SIPRI’s unique military expenditure database backwards in time from 1988 to the 1950s. He is a regular contributor to the SIPRI Yearbook and presents regularly on issues of arms and military expenditure at conferences and workshops worldwide. Previously he was a Senior Lecturer in Economics at the University of the West

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