30/11/2011 01:18 GMT | Updated 30/11/2011 01:57 GMT

'Alarming' Failures In BAE Systems' Settlement Deal With Tanzania, Development Committee Report Says

A £29.5m settlement payment from BAE Systems to Tanzania has yet to be paid due to major flaws in the way that the plea bargain with the Serious Fraud Office (SFO) was arranged, according to a report from the House of Commons International Development Committee released on Wednesday.

The aerospace and defence company committed to pay the fee as part of an agreement with the SFO to end an investigation into the sale of an air traffic control system to the East African country.

However, eight months after court proceedings ended in December 2010, the payment had still not been made, in part because BAE was not sure that the money would be used legitimately and had not been given guidance on how best to use it, the committee said.

The company had admitted "improper book-keeping" in relation to payments made to an adviser on the deal, Shailesh Vithlani, who received millions of pounds for his part in negotiations. Civil society groups alleged that Vithlani used the money to bribe officials and secure the contracts. The company was not found guilty of corruption offences relating to the sale.

BAE was fined £500,000, and agreed to the £29.5m payment, but the absence of an arrangement on how and when the money should be released meant that the company was able to defer making payments following a request by the Tanzanian government - endorsed by the UK's Department for International Development (DfID) - that the capital be put into the country's education budget.

Under pressure from the select committee, BAE finally decided to accept the proposal in August 2011. The company has set the money aside and is awaiting DfID's go ahead to disburse it, a spokesperson said.

“In July we proposed to make the payment in full to the Government of Tanzania," the company said in a statement. "We are actively working with the Department for International Development to ensure the payment is made in accordance with their procedures, including their requirement for a memorandum of understanding to cover the arrangement and we remain ready to make the payment as soon as DfID indicate that we can do so. We look forward to bringing the matter to a conclusion.”

“The way that BAE has handled this whole process has been quite shoddy," Malcolm Bruce MP, one of the committee members, said. “Dragging it out this way has needlessly created the impression that BAE was acting in bad faith. The company should have paid up much sooner.”

Tanzania has now pledged to prosecute those involved in the case, in another blow to the company's reputation. A much larger corruption case in South Africa, involving BAE Systems, Saab and Thales, is now being reopened by the Pretoria government, with hearings around that $10bn deal to be held in public.

Andrew Feinstein, the former South African MP who has been among the leading voices for further investigation into that case, told the Huffington Post in an interview two weeks ago that he expected the hearings to throw up damning new details.

In 2010, BAE paid $400m to US authorities for paying intermediaries who used the money to bribe officials in the Middle East and Eastern Europe, years after an SFO investigation into the same deals fell apart under government pressure. The SFO also dropped its investigation into the South African deal.

"Bribery is not a victimless crime and it is important that reparations are also made to the countries whose citizens suffer when bribes are paid," Chandu Krishnan, executive director at the anti-corruption watchdog Transparency International, which made a submission to the committee's report, said.


“The long saga of allegations about corruption involving BAE Systems has been a national embarrassment to both the UK and Tanzania, and it is astonishing that no individual has yet been found guilty despite the company having to pay fines and reparations of $450 million for Tanzania and other cases.   We are pleased to hear that the Tanzanian government may prosecute individuals, and hope that the UK authorities will cooperate fully if UK nationals are found to have broken Tanzanian law."

In Tanzania, according to the select committee report, the SFO left the company to decide how best to spend the money. DfID advised the local government, which sent a proposal that the £29.5m be used for buying educational material and to upgrade school buildings. The secretary of state for international development, Andrew Mitchell, wrote to the chairman of BAE Systems in July 2011, urging them to accept the plan.

The company's reply stated that it had received a number of applications from third parties and, concerned that payments direct to the government would not be used to the maximum benefit to the country, was minded to use the money to support other causes in the country.

The select committee said that it was "surprised" that, given its admitted lack of expertise in investing in development projects, that it did not seek the advice of DfID earlier in the process. Such consultation should become routine in future cases. The fact that the SFO's bargain agreement set no timescale for payments to be made and no requirement that the money be paid to specific types of recipients was "alarming", the report said.

The government should take more action to improve the transparency of investigations and prosecutions of transnational financial crimes, the committee found. Changes to the Bribery Bill - which came into force this summer and specifically targets the use of agents and intermediaries to secure contracts by bribing officials - are not required, it said, but the secretary of state for justice should commit to publishing an annual report on tackling international corruption.

Future plea bargains need to be far more tightly drawn, the committee recommended, but it should not be necessary to legislate to ensure that such agreements include reparations to developing countries that have been impacted by international corruption.

Institutional weakness in developing countries mean that many are vulnerable to corruption. Widespread corruption robs citizens of public finances, reduces competitiveness and damages social mobility and cohesion.

Some industries, including the mining and energy sector, have made tentative moves to create voluntary agreements to publish their payments to official bodies in a bid to clean up their industry. Programmes, such as the Extractive Industries Transparency Initiative (EITI) have been adopted across Africa and Central Asia, creating contracts between companies, civil society and national governments ensuring that data is published.

The United States' Foreign and Corrupt Practices Act (FCPA) has been aggressively prosecuted in recent years, and the Bribery Bill, the UK's response to the problem, is widely seen as solid legislation, even if the government's guidance attached to it has diluted its efficacy, according to civil society groups. The Dodd-Frank financial reform bill in the US also includes provisions on how resource companies report payments made to governments, particularly in conflict areas. The European Union is considering similar legislation.

However, bribery remains a major problem internationally, and the arms industry is believed to be the among the worst perpetrators. Transparency International figures has estimated that as much as 40% of all corruption worldwide is related to the weapons trade. That industry's links with government and national security has insulated it from censure.

Feinstein said in his Huffington Post interview that, behind the abstract numbers and headlines on bribery, he had seen the effects of corruption and the arms trade in his home country. A $10bn contract for aircraft and other weapons systems agreed in 1999 was helped through due to lobbying and illicit payments - two senior figures connected with the government have been charged with fraud and corruption.

"I've seen the devastating impact that this trade has had firsthand in South Africa," he said. "Only 11 of the 24 Hawk [training jets] that we bought have ever been in the air because we simply can't afford to fly them. More than half the 26 Gripen jet fighters we bought have been mothballed without ever flying, because we can't train the pilots to fly them on the hawks and we can't afford to put them in the air.

"But at the same time that the arms deal was being negotiated, [then president] Thabo Mbeki was telling South Africans that we couldn't afford to provide anti retroviral medication for the over 5m South Africans living with HIV or Aids. And in the five and a half years immediately after we started paying for the arms deal, according to a Kennedy School of Government public health study, at least 355,000 died avoidable deaths because they simply couldn't afford to buy the medication they needed to stay alive. But we had $10bn to spend on weapons that we didn't need."