New M&G report: BAE’s ‘bribery’ channel


The Mail & Guardian newspaper reports a new cache of documents shows “how British arms multinational BAE Systems (BAE) planned a payment channel so covert its own business units would not know the details” — and then used it to push more than R1-billion to “marketing advisers” on the South African arms deal.

The documents, extracted from the British Serious Fraud Office’s investigation into BAE, were obtained from a source in Europe by the M&G Centre for Investigative Journalism and Swedish television journalists, the paper reports today.

Resulting broadcasts in Sweden forced arms manufacturer SAAB to admit last week that BAE had irregularly used a South African joint venture between the two companies to channel R24 million to a “South African consultant” — former defence ministry advisor Fana Hlongwane. SAAB produces the Gripen jets South Africa bought at the turn of the century as part of the R60-billion [sic*] arms deal.
“These revelations fit with the details of civil charges that the United States State Department brought against BAE last month — and that BAE promptly settled by agreeing to pay a record US$79 million (R550 million) fine,” the M&G adds. The civil charges overlapped with two criminal matters already settled by BAE in the US and Britain, but with one significant difference: this time BAE’s payments to secure part of the South African arms purchase formed part of the charges.

The state department charges focused on the covert nature of the payments BAE made through its “Red Diamond” system, which bypassed US laws meant to prevent foreign bribery and arms proliferation. BAE and SAAB were both subject to US jurisdiction because their aircraft contained US technology.
“BAE’s settlement with the State Department, like SAAB’s admission last week, poses new challenges for South African authorities that have closed all investigations into the arms deal and steadfastly rejected calls for a judicial inquiry,” the M&G avers.

BAE and Hlongwane have not denied the fact of the payments, but have denied that they were bribes. What remains to be explained is why payments were made through elaborate and covert channels when there was nothing to hide.

Planning Red Diamond

The cache of documents obtained by the M&G Centre include BAE internal memorandums dating from the mid-1990s. A first memorandum outlined the sheer scale of BAE’s payments to an army of “marketing advisers” helping to lubricate arms sales across the globe. In 1995, 225 “brass-plate advisers” got a total of £25 million (R275 million) and 74 “confidential advisers” another £21 million (R230 million).

A second memorandum considered alternatives to hide such payments. “It has been suggested that in order to increase security and confidentiality of marketing adviser payments, consideration should be given to the possibility of making these payments through a company set up for the purpose and given a name which has no connection with BAE. For the purposes of this note the company is called JBL (Joe Bloggs Ltd),” the memorandum stated.

It listed three alternatives. The first, according to which BAE business units would deal with the advisers but pay them through Joe Bloggs Ltd, was considered risky as “the wide circulation in BAE … would continue” and “the system would deter casual observers but would still be obvious to anyone investigating”.

A second alternative — transferring liaison with the advisers from business units to BAE headquarters at Farnborough near London — was considered “still transparent if investigated”. The third alternative, which was eventually chosen, involved incorporating Joe Bloggs Ltd offshore “with sufficient expert directors (and staff?) to be credible”. It would pay the advisers with funds transferred from BAE headquarters “in round numbers blocks”, which in turn would be derived from levies imposed on BAE business units.

The “advantages”, the M&G said included that paperwork could be stored offshore; business units would know no more than the amount of marketing levy they paid to headquarters; and “the arrangements can be justified if investigated and would be difficult to penetrate anyway”. A separate memorandum considered how business units would know by how much to inflate prices for their weapons if they did not have details of how much would flow back to the “advisers”. The solution: headquarters would simply inform business units of “percentage enhancements” to slap on their pricing. These could be described in company records as “HQ management charges etc”.

Another memorandum confirmed an instruction that “covert paperwork should be removed offshore” — Switzerland was eventually chosen. It recommended that, record at headquarters should be limited to the minimum. “There are about 350 covert agreements in existence so it is impossible to remember them all. It will be necessary therefore to keep as a minimum a single computer listing at Farnborough, preferably on an easily removable laptop.”

US charges

The US State Department’s charge sheet against BAE — called a “proposed charging letter” because it was a civil matter — takes up the story: “In February 1998, respondent [BAE] engaged Uniglobe Aktiengesellschaft, a trust company in Vaduz, Liechtenstein, to create Red Diamond Trading Ltd, an offshore company, located in the British Virgin Islands … Although not a subsidiary of respondent, Uniglobe structured Red Diamond in a manner in which Red Diamond could not act without respondent’s written agreement …
“The purpose of Red Diamond was to facilitate payments to third-party brokers hired by the respondent … There were approximately 350 covert agreements with 299 brokers. Red Diamond operated with intent to circumvent the normal payments reviews.”

All in all, according to the charges, Red Diamond made more than 1000 covert payments to brokers — another word for BAE’s “marketing advisers” — over the nine years of its existence. This period, 1998 to 2007, corresponds with a massive flow of funds to Hlongwane and a handful of others who helped BAE clinch its South African sales.

The State Department charges were an outflow of a US criminal investigation into contraventions by BAE of the Foreign Corrupt Practices Act. BAE settled it in March last year by pleading a lesser charge that did not involve knowingly bribing officials, and paying a US$400 million (R2.8 billion) fine. No reference was made to the South African deal.

After the plea, the State Department required BAE to come clean on contraventions of the US Arms Export Control Act, which is intended to control arms sales involving US technology and prevent bribery by requiring broker fees to be reported. According to the charging letter, the British company came clean on broker payments it should have reported in respect of deals to sell or lease Saab’s Gripens to the Czech Republic and Hungary. When the State Department reviewed further Gripen deals, it discovered that no broker fees had been declared when it issued a licence in 2002 authorising the export of US technology for the Gripens that BAE and Saab were selling South Africa,” the M&G said.

This was contradicted by evidence the department obtained: “Respondent [BAE] or its representative, Red Diamond, made payments to brokers involved in securing the sale to South Africa. Respondent failed to disclose payments as required.” This, and a host of related offences revolving largely around the Red Diamond payments, led to BAE’s prompt settlement last month. The US$79-million fine it agreed to pay is the biggest of its kind the state department has levied.

SA payments

Soon after Red Diamond was formed in 1998, it appears to have become the vehicle of choice to pay BAE’s “advisers” on the South African deal, which was then being finalised, the M&G said. Among the documents obtained by the M&G Centre is an October 1998 contract between BAE and Arstow Commercial Corporation, a British Virgin Isles company controlled by, among others, Hugh Thurston, who was financial adviser to former British prime minister Margaret Thatcher’s family.

The contract promised a commission of 1.5% on the sale of Hawks and Gripens to South Africa. In April 1999, the contract was substituted by another that promised the same 1.5% fee, but with Red Diamond replacing BAE as the principal. In September that year — with the arms deal negotiations in their final stage — Arstow signed a contract with another entity, Westunity Limited. The latter promised to “provide the services of Fana Hlongwane, who will use his best efforts to promote the reputation and sale of the product in the territory”.

At the time, Hlongwane had only recently resigned as then-defence minister Joe Modise’s adviser.

A back-to-back contract, in turn, was signed between Westunity and Hlongwane, who was to “promote the sales of the products of Westunity”. A British Serious Fraud Office list of transfers from Arstow’s accounts to Hlongwane through Westunity and another company in Hong Kong, which is also part of the document trove, shows that the money started flowing almost immediately. An amount of £100 000 (R1.1 million) was paid in October 1999, shortly before the arms contracts were signed, whereas £550 000 (R6 million) was paid in May 2000, after the contracts were signed. By July 2001, Arstow had remitted £4.9 million [now R54 million] to Hlongwane’s entities.
“The same convoluted pattern — from Red Diamond to Hlongwane and others, often through several offshore stages — led to the payment of a staggering total of £103 million (R1.13 billion) in respect of the BAE and Saab sales in South Africa, according to an affidavit by fraud office investigator Gary Murphy that was previously reported on by the M&G.” Murphy stated: “I suspect that a primary reason behind the inception of Red Diamond was to ensure that corrupt payments could be made, and that it would be more difficult for law enforcement agencies to penetrate the system.”

The fraud office’s BAE investigation was terminated last year after a settlement in which BAE admitted guilt on accounting-related charges in only one of the matters investigated, the sale of radar equipment to Tanzania.

A paper trail that leads to millions

The new cache of documents obtained by the M&G includes a contract signed between the South African National Industrial Participation company (SANIP) and arms deal agent Fana Hlongwane.
“This document forced SAAB, the Swedish builder of the Gripen fighter jet, to confirm last week that at least R24 million was paid through SANIP to Hlongwane by SAAB’s partner, BAE Systems, allegedly without SAAB’s knowledge,” the paper said. BAE ran the South African company on SAAB’s behalf.
“Strikingly, the contract commits Hlongwane to deliver outcomes over which he could not have had a bona fide influence — and it promises him a fortune in return,” the M&G added. SAAB set up SANIP to manage the enormous offset obligations generated by the purchase of Hawk and Gripen fighter aircraft.

Most observers believed the offset requirements — investments of US$2 billion and export promotion of US$5.2 billion by April 2011 — were pie in the sky and would need significant massaging of the figures to be achieved, even on paper. The SANIP contract, running from August 2003, agreed to pay Hlongwane’s consultancy firm a once-off fee of R8 175 000, a quarterly retainer of R1 875 000 and two enormous success fees.

The first success fee of R22.5 million would be paid if the South African government confirmed, in writing, that BAE had achieved its first offset milestone — achieving investments of US$300 million and exports of US$2 billion — by April 2004. It appears that this was paid, though clearly there were issues around meeting the deadlines. An amendment in August 2006 allowed for the payment of an additional R1 275 000 bonus following “resolution … of the issue relating to the credit review timing under NIP [the offset programme]”.

Hlongwane was promised a further R30 million if the government certified that BAE had achieved the final April 2011 milestone. It is not known whether this amount has indeed been paid. “Hlongwane had no obvious industrial experience and, indeed, British investigators who seized BAE documents and questioned its executives could find scant evidence that he supplied significant input,” the M&G noted. “It is not clear how Hlongwane was regarded as being able to influence the offset process — other than on the basis of lobbying politicians and officials to engage in the required accounting gymnastics to produce the required approvals.”

Documents show that SANIP also paid Hlongwane R4.2 million for a report on black economic empowerment. The only justification BAE could produce for this largesse was a two-page report on the choice of a strategic BEE partner. “The SANIP contracts and payments are only a part of a complex series of payments and agreements between Hlongwane and BAE or its agents, most of which were ‘covert’ and channelled through offshore companies and banks. The M&G has previously reported that he was paid more than R200 million in total.”

Even Hlongwane’s “overt” contract with SANIP was allegedly never disclosed to Saab, although the Swedish company was formally the 100% owner of the offset company until it was transferred to BAE in 2004, the newspaper said. Investigators always suspected — but have never had the opportunity to prove — that these secretive arrangements were designed to facilitate onward payment of monies by Hlongwane to South African government officials who could influence the decision, and to disguise delayed rewards to Hlongwane himself for influence exercised in the 1990s when he was special adviser to defence minister Joe Modise.

Hlongwane could not be reached for comment, the paper said. It added documents related to this report are available online at and

The Business Day newspaper, meanwhile reports today the opposition Democratic Alliance (DA) party also has a trove of new documents “purportedly showing UK arms giant BAE Systems paid … Hlongwane”. The paper notes DA MP David Maynier yesterday released details of contracts between SANIP, and Hlongwane Consulting, Fana Hlongwane and Ngwane Aerospace – of which Hlongwane was the sole director. “Maynier said the papers amounted to prima facie evidence of bribery and/or corruption and raised serious questions,” the paper said.

BAE Systems in London responded yesterday that these “and other matters were fully reviewed by the Serious Fraud Office (SFO) and formed part of the overall resolution that the company reached with the SFO in February 2010.” Maynier has sent copies of the documents to the police’s Directorate of Priority Crime Investigation (also known as the “Hawks”) and Parliament’s public accounts committee.