House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Eighth Report

6 ALLEGATIONS OF CORRUPTION IN DEFENCE CONTRACTS IN THE 1970S

95. It is unusual for select committees to examine in detail events which occurred over 30 years ago, that is usually the territory of the historian. There are obvious problems. As the Secretary of State for Defence, Des Browne MP, pointed out when he gave oral evidence on 17 January 2008 he was "impeded by the limited degree of knowledge that I can have of things that happened 30 years ago"[224] and many of those involved in the matters at issue were no longer alive.[225] But we decided, exceptionally, that as what the Government described as "very grave allegations"[226] have been made persistently since 2003, to scrutinise the accusations in more detail.

96. The broad charge is that since the 1970s the Ministry of Defence's (MoD's) defence exports services organisation has been aware of, colluded with and have facilitated defence exports to the Middle East which have been tainted with bribery and corruption. We and our predecessor Committees have received a number of allegations in support of the charge from the general—that bribery was widespread in the Middle East in the 1970s[227]—to detailed allegations surrounding specific contracts.[228] In view of the passage of time we decided that, rather than embark on a general and lengthy review of contracts with the Middle East, the best course was to focus on one case. The obvious candidate was the MoD's acceptance in June 1976 of the fees charged on two contracts to Saudi Arabia. There is material available for examination—papers now available in the National Archives[229]—and the case is, we consider, representative of the issues that arise for those attempting to examine allegations that bribery took place in the 1970s.

ALLEGATIONS MADE IN JUNE 2003

97. The allegations concerning the June 1976 case arose following accusations made in The Guardian in June 2003. The newspaper contended that the British Government's own arms sales department—the Defence Sales Organisation (DSO, the predecessor of Defence Export Services Organisation, DESO)—was directly implicated in bribery abroad in the 1970s.[230] More specifically that:

MoD files showed that DSO officially authorised "special commissions" paid by arms firms;
payment arrangements were even written by civil servants into the secret contracts on government-to-government arms deals; and
firms which paid the bribes, described as "commonplace in certain parts of the world", were exempt from normal MoD rules banning corruption.

98. Our predecessor Committees put these allegations to MoD, which in July 2003 supplied a memorandum rejecting the claims that bribes had been paid by DSO.[231] Subsequently, we received further evidence and commented on the allegations in our recent reports.[232] This year we put the allegations directly to the Secretary of State for Defence when he gave oral evidence on 17 January 2008. He told us that he had "done a fair amount of enquiry"[233] on the issues and that "the position regarding allegations of bribery remain[s] the same as was set out in 2003 and that is that they are totally unfounded".[234]

THE 1976 GUIDELINES

99. In the 2003 memorandum the MoD explained that DSO staff dealing with defence exports were instructed to observe the following "explicit and careful" principles:

a) public money should not be used for illegal or improper purposes;

b) officials should not engage in, or encourage, illegal or improper actions whether in their relations with UK or overseas firms; and

c) direct employment of agents should be avoided so far as possible. If agents had to be employed then they should be reputable and the fee should not be excessive in relation to the lawful and proper work involved.[235]

100. In a memorandum to our current inquiry the Campaign Against Arms Trade (CAAT) pointed out that the principles to which the MoD referred had been set out in guidelines issued on 9 June 1976 by the then Permanent Secretary at the MoD, Sir Frank Cooper, to Sir Lester Suffield, then Head of Defence Sales.[236] The MoD supplied us with a copy of the 1976 Guidelines.[237] The Guidelines themselves make it clear that the stimulus for their issue was "the current interest in the general subject of special commissions and similar arrangements in relation to commercial and business deals" and "the importance of maintaining strict standards in the Defence Sales field".[238] The Secretary of State made the point to us that the 1976 Guidelines were "to ensure that [officials] stayed within the law and did not act corruptly".[239] In contrast, CAAT took the view that the June 1976 case which we discuss below showed that the Guidelines, contrary to what the MoD had been telling the Committees, were not "to ensure legality and propriety in the handling of Government-to-Government contracts".[240] We are unclear what exactly CAAT is alleging on the purpose of the 1976 Guidelines. If it is that the 1976 Guidelines were window dressing, we consider that assessment too severe for two reasons. First, the 1976 Guidelines were classified "confidential" and were not published at the time. Second, the Guidelines contain clear guidance to officials to report cases where fees or commissions "appear excessive in relation to the level and propose work which the agents undertakes[,..] the agent should not be engaged without reference to [the Permanent Secretary]".[241] This procedure was followed by Sir Lester within the following two weeks.

The June 1976 case

101. In the "context"[242] of the 1976 Guidelines on agency fees Sir Lester prepared a minute to be sent to Sir Frank; a copy of the draft minute was placed in the National Archives in 2007.[243] In the draft minute Sir Lester set out his concerns about the fees to be paid in respect of two contracts to supply arms to Saudi Arabia. On the first contract, the Saudi Arabian Air Defence Assistance Programme, Sir Lester recorded in the draft that the UK contractor expected to pay fees which appeared "to represent a significant increase" over the fees paid on an earlier phase of the contract. He believed that these fees had been "augmented by payments made to agents by [the UK contractor's] sub-contractors (eg building and catering sub-contractors)". Sir Lester then added: "There will be considerably less work for these sub-contractors in the new programme and therefore less opportunity to conceal agency fees in their prices".[244] This final sentence was removed from the finalised minute put to Sir Frank on 23 June. (The agency fees on the first and the second contract, Sangcom Project, were of a similar magnitude, 15%.)[245] Similarly, other sections of the draft were removed from the finalised version sent from Sir Lester to Sir Frank. They were as follows:

In paragraph 8 the draft minute stated that the agency fees, "although described as 'technical consultancy', amounts in practice to the exertion of influence to sway decisions in favour of the client".[246]
In paragraph 10 the draft explained that the Saudi Government "would certainly not officially approve the payment of fees, although they undoubtedly expect appropriately discreet arrangements to be made. Statements to this effect are made by senior Saudis to visiting senior businessmen in somewhat elliptical language whenever a suitable opportunity occurs, for example by HRH Crown Prince Fahd ibn Abdul Aziz during a recent audience granted to Mr. Greenwood, Chairman of BAC, in the [p]resence of D.Sales 1 [a DESO official] and our Defence Attaché".[247]

102. CAAT argued that, "at the very least, these payments, made via the MoD accounts under a Government-to-Government deal, were improper" and that they "were in direct breach of the [June 1976] guidelines, which the MoD relied on to defend itself to your Committee against the allegations made by The Guardian".[248]

103. We asked the Secretary of State about the draft minute. He pointed out it was not possible to determine who the author of the draft minute was or what his status or authority was and it was not possible for him to construct a reliable picture of the situation 30 years ago.[249] We asked the National Archives about the status of the document. National Archives stated:

250

104. The Secretary of State made the point that the "whole document" should be read.[251] We agree. In the Secretary of State's view the author of the document was alerting Sir Frank Cooper to "the risk of allowing agency fees to rise above a particular percentage level" and making the inference that above a certain ceiling there was a risk of corruption occurring.[252] In his view there were parts of the draft in which the drafter set out certain types of behaviour apparently corrupt behaviour but that was "not the tenor of the document" and that the document said to the Permanent Secretary in the context of his June 1976 Guidelines "this is what we need to be alert to and this is what we need to do to make sure that we do not trigger that risk".[253] Second, the Secretary of State suggested that it was "possible to take about a dozen words out of it"[254] and on the basis of these words put a particular construction on the minute.

105. The sections we cite above and which were subsequently excised before the minute was finalised amounted to over 120 words, about a tenth of the text. These sections were therefore substantial and their removal alters the tenor of the submission to Sir Frank. With these sections removed the minute sent by Sir Lester to Sir Frank focused on the question of the level of fees, rather than the function for which the fees might be disbursed.

106. Although they have no direct knowledge of the 1976 case we asked two witnesses, who have experience and knowledge of exports, about the prevalence of corruption in the Middle East in the 1970s. First, we asked Transparency International (UK) whether it had been surprised when the former Secretary of State for Defence, the late Lord Gilmour, was reported to have said that "you either bribed and got the deal or you did not bribe and you did not get the deal in relation to UK arms exports to Saudi Arabia in the past".[255] Transparency International (UK) replied:

256

Second, we asked the Export Group for Aerospace and Defence (EGAD) a similar question and we set out in full its reply and the subsequent exchange:

Chairman

Mr Hayes

257

Chairman

Mr Hayes

Chairman

258

Extra territorial jurisdiction for criminal offences

107. We considered one other matter arising from The Guardian's allegations[259] made in June 2003 concerning bribery in the DSO. In responding to the allegations the MoD pointed out that since 1948 by virtue of section 31(1) of the Criminal Justice Act of 1948 UK civil servants had been subject to extra territorial jurisdiction for criminal offences if all the elements of the offence were committed overseas.[260] But as the Government itself pointed out that "for a prosecution there needs to be a complaint, evidence and an investigation" and, when he gave evidence, the Secretary of State was "not aware of any complaint and investigation that took place in relation to the 1948 Act".[261] He made it clear that he was not suggesting the inference should be drawn that the absence of a prosecution meant that there was no breach of the 1984 Act.[262] He did not know if, at any time since the 1970s, a complaint had been made.[263] The Secretary of State added for completeness' sake that the extra-territoriality jurisdiction went beyond that imposed by the 1948 Act on public servants as "there was in the common law such a jurisdiction relating to people who were not public servants".[264]

108. We were grateful to the Government for explaining the legal position and we take the Secretary of State's point about drawing conclusions from the absence of evidence of complaints or prosecutions under the 1948 statute or the common law. We accept that without an exhaustive study of the files from the 1960s it would be unjustifiable to conclude that section 31 of the 1948 Act and the common law jurisdiction were dead letters. We can, however, venture an observation. Neither the 1976 Guidelines nor the draft or finalised minute from Sir Lester Suffield to Sir Frank Cooper referred to the 1948 Act or the risk of criminal prosecution. The Secretary of State for Defence said, senior civil servants in the 1970s "knew very well that to act corruptly as a public official was a criminal offence then they probably did not need to be told".[265] He added that they also had the advantage of the Guidelines and that the Guidelines had obviously been "written to ensure that the MoD staff acted lawfully and properly".[266] The 1976 Guidelines state, however, that what is illegal "will depend in the last resort on the law and practice of the country […] concerned, and it is for the foreign government to determine what are acceptable standards within its jurisdiction".[267]

225 Q 21 Back

226 HC (2003-04) 390, Ev 34 Back

227 "We bribed Saudis, says ex-minister", The Daily Telegraph, 17 June 2006, p 6; Ev 80, para 17; Ev 81; HC (2004-05) 145, Ev 57; we put some of these allegation to the MoD, which responded in November 2006-see HC (2006-07) 117, Ev 114. Back

228 See Ev 85. Back

229 File DEFE 68/319, National Archives, Kew; see Ev 81. Back

230 "Web of state corruption dates back 40 years - Shielded by secrecy law - the system of 'special commissions' still flourishing today", The Guardian, 13 June 2003, p 11 Back

231 HC 390 (2003-04) Ev 34-35 Back

232 HC 873 (2006-07) paras 22-24; HC 117 (2006-07) paras 341-43 Back

233 Q 16 Back

234 Q 15 Back

235 HC (2003-04) 390, Ev 34, para 4 Back

236 Ev 79-80, paras 12-13; see also Ev 81; the Government supplied us with a copy of the 1976 Guidelines-Ev 45, Q 23. Back