Afterword to the Picador Edition

Despite the worsening economic climate, since the first edition was published the trade in weapons has continued to prosper. In 2011, global military expenditure totalled $1.74tn1 and between 2007 and 2011 international arms transfers increased by 24 per cent compared to the preceding five years.2

In Greece, one of the countries worst affected by the global financial crisis, it is alleged that the US, Germany and France – Greece’s biggest weapons suppliers – insisted that defence spending not be cut at anything like the devastating levels of social service and other cutbacks. Greece spends more on weapons than any other nation in the EU, a contributory factor in the country’s spiralling debt crisis.3

A former Greek Defence Minister, Akis Tsochatzopoulos, was arrested in April 2012 on charges of corruption. He is alleged to have pocketed $26m in kickbacks in the country’s submarine and missiles deal with Germany’s Ferrostaal (see Chapter 20).4 German authorities fined the company €149m in relation to this deal.5 Ferrostaal negotiated an additional fine of €140m with regards to a bribery case in Portugal. Two company managers were convicted of bribery and received suspended prison terms of two years.6 Yet the company’s internal compliance report identified €1.18bn in questionable payments around the world, leaving the fine seeming little more than a business expense, rather than a punitive penalty.7

In addition, the company’s systemically corrupt modus operandi was further revealed by the creation of an entity called MarineForce International (MFI) in London. The internal independent lawyer’s report not only identified the myriad questionable payments but suggested that MFI was created so that Ferrostaal could ‘insulate themselves from potential tax and prosecutorial investigations in Germany’, and was designed for ‘outsourcing commission payments’ – a vehicle often used to conceal bribes in arms deals. One agent in Indonesia asked MFI for more money, informing the company that ‘I will be putting “grease” into my buddies pockets.’ MFI made no attempt to question the use of the money and paid the agent what he had asked. Other worrying findings in the report included an MFI payment of €42.9 million to their agent in South Korea, who had prior convictions for bribery.8

The internal report paints a picture of a company with ‘a potential attitude of wilful blindness’. An MFI sales executive responsible for Pakistan went so far as to admit that ‘he had no interest in knowing what a consultant did with his fees – even if there were positive indications that the consultant intended to make payments to public officials’.9

BAE, another of the world’s weapons manufacturers seldom out of the news, finally made a payment to the government of Tanzania – the very government that it had allegedly bribed – two years after the company’s sweetheart deal with the SFO (see Chapter 9). The money is to be used for school desks, textbooks and teachers’ accommodation.10

While no Tanzanian prosecution of the case was able to go ahead without further cooperation from the SFO, the head of the Tanzanian Prevention and Combating of Corruption Bureau, Dr Edward Hosea, took the unusual step of declaring that no Tanzanian was involved in the radar scandal. He was very heavily criticized for the statement.11

In July 2012, BAE’s erstwhile eastern European agent, Alfons Mensdorff-Pouilly, was charged in Austria with money laundering and perjury in connection with the BAE case. Prosecutors allege that the money which flowed to the Count was most likely used to bribe decision-makers in central and eastern Europe. He was also charged with giving false testimony to prosecutors and a parliamentary investigation. Mensdorff-Pouilly’s lawyer claimed his client’s innocence, saying the charges were ‘old hat’.12

Steve Mead, deeply involved in the alleged corrupt deals, remains BAE’s Vice-President for Central and Eastern Europe, based in Prague.

BAE’s other close confidant, Saudi Prince Bandar, was elevated to head the Saudi General Intelligence Directorate (GID) in July 2012.13 The news signals the Saudis’ desire to further cement ties with the US in the wake of US support being withdrawn from other regional allies during the Arab Spring. Prince Bandar’s experience in arming rebel movements, in Afghanistan and during Iran–Contra, serves the Saudis’ current strategy of arming rebels in Syria. The GID has also been something of a financial black hole in the past. The personal wealth of its former head, Prince Turki al-Faisal, while he was in Bandar’s position, is well documented.14

Bandar’s father, Prince Sultan, died in October 2011.15 He has been succeeded as Defence Minister by his brother, Prince Salman, who also becomes Crown Prince.16

The shutting down of the SFO investigation into the Al Yamamah deal in which Princes Bandar and Sultan were so involved has marked the SFO and its leadership. Richard Alderman, the former SFO director who oversaw the aftermath, has since said: ‘The damage that was done by what happened was great and will last for a very long time. It was very regrettable and very unfortunate.’17

The SFO has another opportunity to investigate a major UK–Saudi arms deal and resuscitate its flagging reputation with the launch of an official investigation in August 2012. Three whistle-blowers have made startling allegations regarding a communications deal for the Saudi National Guard worth £2bn. The deal, like Al Yamamah, is a government-to-government transaction managed by a team of British civil servants paid for by the Saudi government and is known as SANGCOM. The deal’s prime contractor is GPT Special Project Management, a subsidiary of EADS, the major European arms maker. At least £14.5m in suspicious payments between 2007 and 2010 to two mysterious companies based in the Cayman Islands – Simec International and Duranton International – have already been identified. The whistle-blowers, two former programme managers and a financial officer on the deal, revealed that the two companies received 14 per cent of the equipment budget on the contract yet seemingly provided no goods or services.

The UK’s Ministry of Defence learnt of the payments in 2008 and despite warning the company that such payments would not be allowed in the future, took no action as the disbursements continued for the next nineteen months.18 In fact, the MoD appears to have been complicit in illicit payments from the very start of the transaction going back to 1975 when both the Permanent Secretary at the MoD and the head of Britain’s arms export promotion group corresponded about whether to allow 15 per cent or 10 per cent of ‘agency fees’ in the deal. One of the recipients of these ‘fees’ was Simec International, a company still receiving illicit payments thirty-five years later.19

The accountancy firm KPMG, already under investigation for its failure to stop bribes in the Al Yamamah deal while auditing BAE, is also implicated in the SANGCOM deal. Ian Foxley, the primary whistle-blower and a former lieutenant-colonel in the British Army who served briefly as the programme manager on the deal, has alleged that ‘KPMG, which was the auditor of GPT Special Project Management Limited, was also aware of the corruption, and did not declare it … [despite being] clearly aware since 2007 … [leaving them possibly] guilty of wilful blindness in their auditing and reporting of GPT’s accounts.’ KPMG commented that GPT Special Project Management had not been charged with making corrupt payments, and added: ‘KPMG denies the allegations that Mr Foxley seeks to make against us.’20

The Serious Fraud Office started a ‘preliminary investigation’ in 2011. The Attorney General, Dominic Grieve, permitted this to progress to a full official SFO investigation.21 It is the SFO’s only hope of redeeming itself after its litany of abject failures in relation to BAE, the UK government and Saudi Arabia. Meanwhile, despite the repression of dissent in the kingdom and the intervention by Saudi National Guard troops in Bahrain to brutally crush the democratic movement there, Britain has at no point suspended arms sales to the kingdom.22

This light-touch approach to law enforcement and the arms trade spread to the EU as well. On 17 February 2012, the European body announced that a third of those on EU sanctions lists over the last decade in relation to Zimbabwe were to be removed from the lists, enabling them to travel and conduct business in Europe: fifty-one individuals and twenty companies in total.23 Among those removed from the list was John Bredenkamp, identified by the SFO as one of ‘BAE’s covert agents’ on the South African arms deal. In a statement issued by Bredenkamp’s solicitors, Carter-Ruck – the firm that has previously acted on behalf of both the Church of Scientology and Trafigura in the UK – Bredenkamp indicated that he would continue to pursue the matter in the EU and UK courts:

Since January 2009, I have tried without success to establish the basis on which the decision to impose and maintain sanctions was made. Neither the EU nor the UK has responded to requests to provide such information, even though they were obliged by European Law to provide it … Legal proceedings against both the EU and UK will continue.24

Bredenkamp and a number of his entities still remain on the US OFAC sanctions lists as of 24 July 2012.25

The tortuous history of the South African arms deal that I attempted to investigate while an ANC MP took another interesting turn in late 2011. The dogged arms deal campaigner Terry Crawford-Browne filed a case at the South African Constitutional Court, arguing that the failure to appoint a judicial commission of inquiry into the deal was unconstitutional.26 The Court accepted the constitutional reasoning and instructed lawyers for the South African government to file papers that discussed or disproved the evidence of corruption and maladministration that had been included in Crawford-Browne’s affidavit, which included information from my work. On the deadline given to the state’s lawyers, President Jacob Zuma made the shock announcement that he would appoint a judicial commission of inquiry into the arms deal.27

Zuma, who is himself accused of corruption in relation to the arms deal, appointed the Commission to pre-empt the state’s lawyers having to file responding papers, to avoid having the Constitutional Court determine the terms of reference and composition of the Commission and to address internal ANC politics. The ANC Youth League, a key part of the ‘Alliance of the Angry’ that had brought Zuma to power, had started to fall out publicly with the President by mid-2011. The Youth League threatened, only a few years after demanding that corruption charges against Zuma be dropped, that they would reveal his complicity in malfeasance in the deal.28 By appointing a Commission, the President effectively neutered the topic, at least until after the ANC’s national elective conference in December 2012.

However, complicating his strategy, in March 2012 the opposition Democratic Alliance (DA) won a High Court case enabling them to request a legal review of the decision to drop the corruption and racketeering charges against Zuma which flowed from the arms deal.29 The subsequent legal process has been farcical: key to the decision to drop the charges against Zuma was a series of intercepted communications that were said to show the case against him was the function of a political conspiracy. The DA requested copies of, at the very least, the transcripts of the conversations. Despite a Supreme Court order demanding that the transcripts be handed to the DA’s lawyers, the National Prosecuting Authority, which had controversially dropped Zuma’s charges in 2009, had failed to do so by July 2012, precipitating speculation that the recorded intercepts and the transcripts themselves may not exist.30

Whether the Commission of Inquiry is allowed to get to the dark nether reaches of the arms deal remains to be seen. One positive is that the terms of reference are broad and fairly comprehensive. The judges appointed to the probe have acquitted themselves competently of other tasks in the past. Nevertheless, campaigners are concerned that the Commission has too short a time and insufficient resources to undertake a meaningful investigation. There are also misgivings that secrecy provisions guiding submissions may hinder a full airing of the facts31 – a situation that could potentially be compounded if a worrying and profoundly anti-democratic ‘Secrecy Bill’ that criminalizes the possession and distribution of confidential documents is passed by the government.32 In July 2012, I made a submission to the Commission of Inquiry, offering to present all the evidence at my disposal as well as appear as a witness during the public phase of the hearings in the hope that finally, some modicum of justice may be done in relation to this deal that has so beggared South Africa’s nascent democracy.

The investigation into the arms South Africa bought may well soon require a complementary enquiry into the weapons that South Africans have sold in the post-apartheid era. In March 2012, South Africa’s Sunday Times broke a compelling story of how a young US citizen, Barry Oberholzer – born in South Africa to the former South African consul in Texas – had helped arrange the shipment of a Bell 212 helicopter from Texas, via South Africa, to Iran in 2008.33 Oberholzer’s company, 360 Aviation, had received two letters of support from South Africa’s Department of Trade and Industry, one of which was directed to Iran Air.34 Working together with the Iranian Alizer Valadkhani, Oberholzer developed a complex web of fake companies and documents to secure the transfer of the helicopter from Texas and then move it to Iran.35 Oberholzer allegedly came to his senses when he realized he could be prosecuted for sanctions busting, and decided to become an FBI informant.36

While providing information to the FBI, Oberholzer attempted to stitch together a second deal in 2011 to supply to Iran Bell helicopters, spares and aircraft, worth $300m, over five years. In February 2011, Oberholzer held a meeting with three individuals who he believed could assist him to acquire another letter of support from the Department of Trade and Industry. According to a taped transcript, the three individuals stated explicitly that the letter could be sourced for a not insignificant cash payment. One of them was Prudence ‘Gugu’ Mtshali, the then girlfriend of the country’s Deputy President, Kgalema Motlanthe.37 Although the deal fell through in 2012, it was confirmed that the letter of support had been issued by the Department of Trade and Industry.38 Motlanthe distanced himself from the furore by requesting that the country’s Public Protector investigate the deal and Mtshali’s involvement. Mtshali is ‘firmly of the view’ that she has done nothing wrong.39

The scale of this scandal was dwarfed by an explosive legal application filed by the Turkish mobile phone company Turkcell in the US courts in March 2012. The company claimed that it had been swindled out of a multibillion telecommunications contract in Iran by one of the three major South African mobile phone companies, MTN, which was able to rely on high-level political support in South Africa.40 Two allegations were particularly combustible: first, that MTN had used its political influence to ensure South Africa abstained in an important 2005 decision by the body responsible for monitoring Iran’s nuclear programme – the International Atomic Energy Agency. Second, it was alleged that MTN had used its high-level political influence in South Africa to be able to credibly promise the delivery of a package called ‘The Fish’ – a massive cache of arms including high-powered cannons, attack helicopters and numerous weapons containing US components.41 MTN has denied all allegations, has filed to have the Turkcell motion in the US dismissed and has instituted an internal inquiry. South Africa’s police have confirmed that they are to investigate the claims, while no decision has yet been reached in the US courts.

While on the topic of Iran, alleged Iranian arms procurer Amir Ardebili (see Chapter 16) has been in contact with me since the publication of the first edition, and just a few weeks after returning to Iran following his release from a US jail where he served over five years. Ardebili denies that he ever traded in weapons or arms components but rather contends that he was an innocent trader, ensnared by US intelligence agencies. Our interesting conversations continue.

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The arms-dealing fraternity paid their last respects to one of the most notorious arms dealers of the Cold War era, Sarkis Soghanalian, who died peacefully in late 2011.42

Things weren’t much better for the former Liberian dictator and Merex arms agent, Charles Taylor. After a lengthy and contentious trial, on 18 May 2012 the UN-backed Special Court for Sierra Leone found him guilty of all charges.43 The judgment, running at over 2,500 pages, was a litany of horror. Taylor was found guilty of five war crimes (acts of terrorism, violence to life, health and physical or mental well-being of persons, in particular murder, outrages upon personal dignity, violence to life, health and physical or mental well-being of persons, in particular cruel treatment, and pillage); five crimes against humanity (murder, rape, sexual slavery and any other form of violence, other inhumane acts and enslavement); and one serious violation of international humanitarian law (conscripting or enlisting children under the age of fifteen into armed forces or groups, or using them to participate actively in hostilities).44

Two weeks later, the Court sentenced Taylor to fifty years in prison. ‘The Accused [Taylor] has been found responsible for aiding and abetting as well as planning some of the most heinous and brutal crimes recorded in human history,’ the sentencing judgment stated.45 While most expressed relief at the verdict, some wished for a longer sentence. ‘It is a step forward as justice has been done, though the magnitude of the sentence is not commensurate with the atrocities committed,’ a Sierra Leonean minister commented. Taylor has promised to appeal the guilty verdict and the sentence.46

Meanwhile, of all Taylor’s various arms suppliers, middle men and agents who were central to his brutal regime, only Viktor Bout is currently imprisoned – on charges unrelated to his role in Liberia and Sierra Leone. A judgment is still pending in the case of Gus Kouwenhoven, in which a retrial was ordered in 2010. In 2011, during pre-trial proceedings, Kouwenhoven secured the Dutch court’s agreement that he could call Charles Taylor as a witness.47 Calling Taylor might have been complicated while he was on trial. It is perhaps for this reason that Kouwenhoven’s case has not yet been heard in full.

On 12 October 2011, the courthouse holding Viktor Bout’s trial was deluged with reporters and onlookers. Over the following weeks the prosecutors outlined their detailed case against Bout, accused of attempting to arrange shipments of sophisticated weapons – including surface-to-air missiles – to FARC rebels in Colombia. FARC has long been designated a terrorist group by the US. While the prosecutors were able to present copious evidence, the presiding judge ruled that the phrase ‘Lord of War’ and any mention of Libya and Rwanda were to be avoided. This limited the extent to which Bout’s history, including his work for US government agencies and companies, could be accurately depicted. Defended by the reportedly overawed New York lawyer Albert Dayan, Bout called no witnesses in his defence, only arguing repeatedly that his ‘attempt’ to sell weapons to the FARC representatives was a ruse designed to lure them into purchasing two ageing transport planes.48

It was an argument that the jury found entirely unconvincing, reaching a judgment in two short days. On 2 November 2012, the jury returned a guilty verdict on the four counts for which he was charged: conspiracy to kill US nationals, conspiracy to kill officers and employees of the US, conspiracy to acquire and use anti-aircraft missiles and conspiracy to harbour terrorists.49 Four months later he was sentenced to the minimum term of twenty-five years in prison and an asset forfeiture of $15m.50 His one-time partner, Andrew Smulian, was sentenced to sixty months in prison in late May 2012, of which he had already served fifty.51

Bout immediately indicated that he would appeal the decision. His team has also sought other legal remedies. In July 2012, his lawyer confirmed that they were beginning proceedings in Bangkok to have Bout’s extradition deemed illegal.52 Bout’s wife, Alla, has also filed a request in Russia to have him returned to his motherland to complete his sentence, which if approved in Russia would be formally forwarded to US authorities.53 Bout still retains considerable support among Russia’s senior politicians. Immediately after the verdict the Russian Foreign Ministry declared the sentencing ‘baseless and biased’, claiming that the US justice system was carrying out a ‘clear political order’ to ignore ‘the shakiness of the evidence’.54 Bout’s sentencing has also been raised with Hillary Clinton by the Russian Foreign Minister, Sergei Lavrov.55 Given the manner in which law enforcement is manipulated to the needs of the arms trade, it is not beyond the realms of fantasy that Bout might have done a deal to remain silent about his US-linked activities in return for an undertaking that he be allowed to serve his sentence in the more convivial setting of his homeland.

As ever, developments unfold at a breakneck pace in Bout’s favourite stamping ground, Africa. The eastern half of the Democratic Republic of Congo (DRC) remains a contested and febrile region, dominated by militias of assorted affiliation. In June 2012, a leaked UN report alleged that one of the largest militias in the region, known as M23, had received support and backing from Paul Kagame’s Rwanda, including arms and ammunition. M23 has been accused of widespread war crimes, including mass rape. Soldiers of the militia, who mutinied from DRC’s main military forces, are now in conflict with the Congolese military.56 In response to the news, Western governments, for the first time since the Rwandan genocide, have punished Rwanda by withholding symbolic sums of aid.57 It may mark an important turning point in the broader DRC conflict.

Tension and violence have marked the months following the secession of South Sudan from Omar al-Bashir’s regime in the north. Skirmishes have continued along the borders and the militaries of both countries have remained on high alert. The tension has been driven by the expected dispute about oil. However, in early August 2012, the North and South announced their first ever official compromise agreement.58 Al-Bashir’s regime desperately needs the oil to flow as it relies heavily on oil sales for its income. More than that, oil flows are key to ensuring that it is able to continue to finance an influx of weapons into the country. Since mid-2012, the al-Bashir regime has been knocked back by popular protests similar to those which swept the rest of Arab Africa, albeit on a smaller scale. The regime has responded with an extremely heavy hand, putting its arsenal to deadly use.59 At the same time, the conflict in Darfur, while more muted than previously, continues to rumble on. As recently as July 2012, reports confirmed a number of violent clashes. In response, Amnesty International argued that the fact that only Darfur, rather than the whole of Sudan, is covered by an arms embargo continues to help fuel the conflict, as well as stretch credulity.60

Like South Sudan, post-Gaddafi Libya faces myriad challenges. The nascent authorities don’t have a monopoly on force. Instead, ‘a number of the militias that brought down Gaddafi’s rule have entered into a state of semi-retirement, still retaining their weapons and means of violence.’61 The country will need to carefully negotiate Gaddafi’s legacy of military over-supply. Armed smugglers have looted and are selling arms from Libya’s massive and largely unguarded stockpiles of sophisticated weaponry. The arms have flown everywhere: to militants in Gaza,62 to Niger, possibly into the hands of the local al-Qaeda-affiliated groups,63 and to Mali’s Tuareg militia.64 In addition, unexploded ordnance dotted around the country in large quantities poses a grave threat to Libyans themselves.65 Many of these arms were sourced from major Western suppliers, including the companies covered in this book.

For instance, the UK’s arms promotion group UKTI DSO was secretly at work in Libya marketing military equipment to the infamous Khamis Brigade – a 10,000-strong unit commanded by Khamis al Gaddafi, fifth son of the colonel. The £85m deal for a state-of-the-art command-and-control system made by General Dynamics UK was signed on the fringes of the famous ‘tent deal’ between Blair and Gaddafi in 2007. The contract was supported by the UK government with training by the elite British SAS and advice from British civil servants on how to stop freedom of information requests by British citizens uncovering Khamis’s official invitation to DSEI, the London arms fair. The head of UKTI DSO also let slip that ‘high level political interventions’ had supported UK arms exports to Libya.66 The UK was in fact promoting arms sales to Libya just weeks before the revolution, including inviting high-level military personnel to Britain to view machine guns and sniper rifles among other equipment the regime would use shortly afterwards against its own citizens.67 Just two weeks after the death of Colonel Gaddafi, news emerged of UKTI DSO arranging for a delegation of arms companies to visit Libya to sell security equipment to the transitional government.68

Nearby Egypt’s transition to democracy has been uneven with the military reluctant to hand over power to a civilian Parliament and President.69 The disruptive role of the praetorian military is the legacy of decades of support – and multibillion military aid packages, accompanied by massive bribes for the Egyptian military – largely by the US (see Chapter 19).

In Syria, uprisings began in March 2011 as part of the wider Arab Spring movement. Originally peaceful, the movement was violently repressed by the al-Assad regime. Soldiers were ordered to fire upon protestors and the situation devolved into a civil war with defecting soldiers and citizens forming armed groups.70 Over 10,000 Syrians are thought to have died in the conflict and up to 1.5 million have been displaced.71 Both sides have been accused of human rights violations and the violence has been internationally condemned.

However, Russia and China have blocked UN action on the conflict. Russia, along with Iran, has continued to arm the regime, a key ally in the region.72 Russian contracts for the support of attack helicopters, anti-aircraft systems and other weapons have continued despite international attempts to block shipments.73 In one ground-breaking move the London insurer Standard Club withdrew cover on a ship carrying repaired attack helicopters from Russia to Syria, forcing the ship to return to port.74

The Qatar and Saudi governments are active in arming and bankrolling the rebels.75 This has all but ensured a violent denouement as the region has been flooded with weapons. While the fragmented and diverse groups that make up the Syrian opposition forces are united in their opposition to the regime, there is no guarantee that they will remain on fraternal terms. Blowback may well await.

Unsurprisingly, this has been fertile ground for arms dealers. Among others, Joe der Hovsepian is spending considerable time in Syria, certainly providing weapons to the regime and possibly some of the other protagonists as well.

*   *   *

Another country with a history of bloody civil war is Angola, thanks in part to the weapons supplied by, among others, the Russians and the French (see Chapter 19). It was noted earlier that the Angolagate sentences of Pierre Falcone and Arcadi Gaydamak were controversially reduced. However, it has since come to my attention that they were involved in far more than just acting as dealers on a dubious weapons transaction.

In late 2011, I was handed an astonishing dossier of documents that laid out, in detail, one of the most egregious examples of how arms dealers facilitate corruption in the countries in which they operate. Falcone and Gaydamak made hay on the back of their high-level connections in Angola and Russia, with the connivance of international banks.

The documents reveal that in November 1996 the Angolan government struck a deal with Russia regarding its outstanding and potentially crippling debts.76 The debt was built up because Angola’s de facto government, the MPLA, had relied so heavily on Russian arms and financing to pursue its civil war with UNITA, itself reliant on the backing of the US and apartheid South Africa. By 1996, Angola was calculated to be $5bn in debt to Russia, some of which may have been incurred by the financing of Angolagate. For the Angolan government, repaying the debt in its entirety would be a challenge: in 1996, Angola had a GDP of only $7.4bn. It was unlikely Angola could ever hope to repay the amount in the short term, while Russia, unless it offered some incentive, was unlikely to receive any funds whatsoever.

To resolve this impasse the two governments struck an extraordinary deal in November 1996. The terms were simple: Russia would reduce the total debt to $1.5bn, which Angola would be bound to pay back within twenty years. The $1.5bn attracted interest of 6 per cent with a 2 per cent additional charge for late payment.

The mechanics of the deal were straightforward: Angola would first issue a series of promissory notes that stated that the bearer (in this case Russia) was entitled to money from Angola upon presentation. The promissory notes were of equal value, and reflected the size of instalments that Angola would pay to Russia over the course of the deal. Russia, in turn, would print repayment certificates corresponding to the promissory notes. Angola handed the promissory notes over to Russia, with the understanding that, when Angola made the requisite payments, Russia would hand over promissory notes and the repayment certificates, expunging the debt.

But the simplicity of the deal was a charade. At least a month before the debt deal was signed, Russia issued a decree that authorized the Ministry of Finance to dispose of the Angolan promissory notes on the private market once the deal was inked. It was a move that allowed the introduction of an unnecessary intermediary into the deal called Abalone Investments. Abalone was no dour hedge fund or banking institution, as the name may suggest. It was owned by Pierre Falcone and Arcadi Gaydamak, whose only qualifications for the role were their close connections to Russian and Angolan politicians and their conniving on the Angolagate deal. They had also been ‘mandated’ by the Angolan government in April 1996, prior to the signing of the Russian–Angolan intergovernmental agreement, to renegotiate Angola’s debt to Russia: this meant that they were not only party to the debt’s renegotiation, but would stand to make a fortune by arranging to insert their own private company to profit from the deal as a specious ‘middleman’. Later, as the deal hit a snag, Vitali Malkin, a Russian politician who is currently the richest member of the Duma, became a co-partner in Abalone.

Soon after Angola and Russia signed their ‘intergovernmental agreement’ they entered into a related arrangement with Abalone: the company would purchase the notes and certificates from Russia by meeting Angola’s repayments. Abalone would transfer these notes to Angola once the company had paid Russia. Angola would raise the funds through a pre-financing agreement with Glencore, the multinational oil trader once headed by the notorious Marc Rich, a felon controversially pardoned by Bill Clinton on his last day in office. All these transactions were overseen by a series of escrow agreements between the parties and the Swiss Bank Corporation (SBC, later to become UBS).

However, and crucial to the highly irregular nature of the deal, Abalone would get to purchase the promissory notes from Russia at half price but still collect the full amount from Angola. In other words, Abalone would make a $750m profit for acting as a middleman in a deal that didn’t require a middleman.

That these countries’ treasuries, and citizens, were cheated is clear: Russia likely knew that Angola was willing to pay $1.5bn but would now only receive $750m, while Angola would pay the full $1.5bn even though it most likely knew that Russia would accept half that amount. The documents in my possession suggest that, at the very least, Abalone, the banks and perhaps even Glencore were fully aware of these details; it is also hard to believe that key Angolan officials (including the President, José Eduardo Dos Santos) were not aware of the deal’s basic architecture considering that they were soon to be recipients of large payments from Abalone’s ‘profit’. Either way, if Angola was not aware of the details of the deal, it does not reflect well on Gaydamak and Falcone, Angola’s trusted debt negotiators.

The only possible reason Abalone could have had any value in the deal was to accept a degree of political or commercial risk. This would be true if Abalone was forced to pay if Angola defaulted, but all the evidence suggests this was not the case. But the documents suggest that Abalone never had the funds to save the deal should Angola default, a fact of which all parties, considering their close links, were probably aware. Moreover, Abalone was not legally bound to buy the notes from Russia: their agreement amounted to an offer of first refusal rather than an irrevocable commitment.

As it turned out, Abalone mostly paid Russia after receiving money from Angola’s state oil producer, Sonangol, even though Abalone was supposed to purchase the promissory notes first and secure payment from Sonangol afterwards. The payments could, therefore, have gone straight from Angola to Russia and one of them would have gained over $750m.

Instead, from October 1997 to July 2000, Sonangol made payments to the value of $776m to Abalone’s account at UBS. Over the same period, Abalone paid out a fortune to a range of beneficiaries: $151m was transferred from Abalone’s account in Switzerland to Arcadi Gaydamak, while just over $88m found its way to accounts that were in the name either of Pierre Falcone or of companies of which he was the beneficial owner. Vitali Malkin, who came to the deal in late 1999, received $48m, apparently on the basis of the investment stake he held in Abalone.

Extraordinarily, a number of senior Angolan politicians were also among the recipients. In October and November 1997, at exactly the time that Sonangol started paying Abalone, $36.25m was transferred to an account in the name of Camparal via an intermediary account controlled by Pierre Falcone. French investigators who probed the deal confirmed that Camparal was beneficially owned by José Eduardo Dos Santos, the President of Angola. Elísio de Figueiredo, who served as the country’s first ever UN diplomat in the 1970s and later as the country’s emissary without portfolio in Paris while the Angolagate deal was being negotiated, owned Tutoral, a company whose accounts were credited with $7.38m via the same routes. A further $3m was paid in 2000 to José Leitão Da Costa e Silva, Minister in the Angolan Presidency from 1992 to 2004. Finally, Joaquim David, director general of Sonangol from 1989 to 1998, received $8m via his company Penworth.

And this is only the money that can be traced. Just over $100m was transferred from Abalone to beneficiaries whose true owners remain a mystery. The Russian Ministry of Finance received only $161m in direct cash transfers from Abalone in 1997 and 1998. Thereafter it was paid through Russian debt instruments that Abalone bought on the open market and returned to Russia at their face value. The market value of these debt instruments (as opposed to their face value) was extremely low. This suggests that Abalone may have made even more profit than was originally due as a result of the difference in the instruments’ market and face values.

The deal, already stretching credulity, soon took an even more farcical turn. By the early 2000s the activities of Falcone and Gaydamak had caught the attention of French and Swiss investigators, largely because of their involvement in Angolagate. On 11 December 2000, Pierre Falcone was arrested in France. An international arrest warrant was issued for Gaydamak in January 2001, although he evaded arrest and has been on the run ever since. The following month Swiss investigators swooped on Abalone’s banking facilities in Switzerland, freezing the account and seizing all the promissory notes stored with UBS in Geneva. Documents and assets belonging to Falcone at UBS and the Discount Bank and Trust were seized or frozen soon afterwards. Later, Russia appealed for the release of the documents in the Swiss Courts – a request that was granted even though the deplorable nature of the debt deal was clear. During this litigation Russia claimed that it had suffered no prejudice as a result of the deal – a statement that borders on the incredible considering the ludicrous structure and nature of the deal.

Nevertheless, the seizures made the continuation of the debt deal via Abalone’s Swiss bankers impossible. Gaydamak, therefore, instructed Angolan officials that the arrangement should continue by means of payments to an entity named Sberinvest in Cyprus. Superficially this made sense as Russia had indicated, when it had opted for payment in Russian debt instruments, that it wished all payments to be routed to Bank Sberinvest, Moscow. However, Gaydamak’s Cyprus shell had no link to Sberinvest, Moscow. The Russian-Israeli performed this sleight of hand without the knowledge of Falcone and Malkin, who also claimed that the use of Cyprus Sberinvest constituted a ‘fundamental transgression’77 of the agreements signed between Abalone, Russia and Angola. This suggests that Gaydamak’s ruse was designed to dupe not only his business partners, but Angola as well.

Between March and August 2001, Gaydamak’s Sberinvest shell received $618m from Sonangol in what Angola believed were the last payments needed to settle the remaining debt. Of this, $131.5m was transferred to an account at the Russian Interprombank, which seems to have been intended for the Russian Treasury. So, once again, Russia only received a small percentage of what it was due. Allegedly $26.3m was transferred to Angolan beneficiaries, with a further $80m paid to other unknown beneficiaries. The bulk of the remainder – $435m – was paid over to three investment funds. This money, and the income earned from investing it, was owned by Arcadi Gaydamak. By double-crossing his colleagues, Gaydamak had made himself an extremely wealthy man.

Almost unbelievably, it was only in July 2005 that both Russia and Angola began to cotton on to the scale of the scheme. In July 2005, during an official trip to Luanda, Russian officials discovered, to their apparent amazement, that the Angolans believed the debt was fully paid off. The Russians explained that they had only received partial payment towards the completion of the debt agreement. Following this, a further meeting took place in September 2005 involving Gaydamak and representatives from both countries. According to the minutes of the meeting, Russia claimed that it was still owed over $600m. A solution had to be found. Finally, in November 2005, Abalone and Angola signed a new deal, in which Angola agreed to immediately pay $387m owed to Russia, thus ending the debt deal. Abalone, for its sins, was required to pay back $206m to Angola.

Whether Angola ever received the funds from Abalone is unknown. If it did not, then Angola would have spent $1.784bn from 1997 to 2005 in order to settle a debt of $1.5bn – despite Russia being willing to accept only $750m. Thus, in total, Angola paid over $1bn more than if Abalone had not been part of the transaction. Russia only received about $750m of an initial $5bn debt, losing out on the same amount again if it had dealt directly with Angola. The only parties that benefited from the transaction were the small handful of bent politicians, bankers and arms dealer middlemen – Gaydamak primary among them.

Despite the fact that the deal was investigated in Switzerland and, tangentially in Israel, no party to the bizarre arrangement has ever been prosecuted and no funds have been seized. The only substantive litigation relating to the deal was an Israeli court case launched by Falcone and Malkin against Gaydamak. The object of the case was to gain access to profits they believed they were owed from Gaydamak’s Cyprus diversion. Luckily for Gaydamak the case was thrown out due to technicalities and procedural issues. As a result of the deal he remains in possession of considerable funds.

The Russian–Angolan debt deal not only reminds us of the den of iniquity that is the world of the arms trade, but is also yet another example of how arms dealers utilize their experience of money laundering, corruption and dealing at the high table of state power for other criminal endeavours. All the while retaining their untouchable status that protects them from the legal consequences of their venal actions.

In mitigation of French justice it is pleasing to see that in the seedy arms-deal-related political funding scandal known as L’Affaire Karachi (see Chapter 20), arms dealer Ziad Takieddine, then Prime Minister Édouard Balladur’s campaign director, Nicolas Bazire, and Thierry Gaubert, a senior adviser to Nicolas Sarkozy, have all been charged with money laundering relating to the case. Charges could even be laid against Sarkozy himself after searches of his house and office.78

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In May 2012, a Paris court of inquiry finally started an investigation into the controversial French sale of two submarines to Malaysia in 2006 (see Chapter 20). It has undertaken to investigate both the alleged bribes and the murder of a Mongolian model, translator to the negotiating team on the deal and allegedly the lover of Razal Baginda, a close associate of the then Defence Minister and current Prime Minister. Baginda and two of the then Defence Minister’s bodyguards were charged with murder. The bodyguards were convicted and sentenced to death, though they intend to appeal. Incredibly, Baginda was not required to answer to the charges of abetting the murder. He was released and now lives in exile in Britain.79

There has been progress too on the Gerdec case (see Chapter 16), at least in Albania. Nineteen Albanian officials were jailed, the court ruling in March 2012 that they violated the security procedures for destroying military equipment. The most senior officials jailed were Ylli Pinari, the former weapons department chief who was jailed for eighteen years and Luan Hoxha, the former head of the armed forces, who was sentenced to six years in jail. Hoxha has left Albania and is now living in the United States, according to media reports. However, none of the politicians involved in the tragedy of Gerdec have been prosecuted. The families of the victims are still left without justice: ‘Who killed our 26 beloved ones remains an enigma,’ they said, ‘We faced mass murder and that crime should have been judged as such.’80

Efraim Diveroli, the young American gun runner who was found guilty in the US of trading in the Chinese ammunition sourced from Albania, has appealed his four-year sentence. His attorney has argued that mental health issues, including bipolar disorder, meant he was not competent to sign a plea agreement.81 Ralph Merrill, who provided the due diligence on Diveroli, despite having a financial interest in the gun runner’s company, appealed against his conviction on a range of procedural grounds. He was turned down on all counts.82

The FCPA sting operation known as the ‘shot show showdown’ displayed promise as an example of an evolving strategy to pro-actively fight corruption in the US arms trade (see Chapter 16). However, a promising idea devolved into farce as the court cases produced two mistrials after juries were deadlocked and several acquittals, and despite guilty pleas from some defendants the US Department of Justice dropped the case. The principal issue appeared to be with the use of sting tactics and the cooperating witness, Richard Bistrong, whose reliability and role in the operation was questioned.83 While investigations continue into the wider activities of some of the companies involved in the sting, the only person in jail is Bistrong, who was sentenced to eighteen months for his involvement in an earlier bribery case.84

Just as the twenty-two caught up in the sting operation walk free, so the MICC, in the behemoth of the global arms trade that is the United States, continues with business as usual.

Defence contractors, their lobbyists and apologists on Capitol Hill are already screaming blue murder at the prospect of a worst-case 2.5 per cent cut in the Pentagon budget for 2013, from its current record-high trend.85 Even this extremely modest cut is unlikely to actually be implemented, as suggested by what is happening with the defence contractors’ pet projects at a time when the companies are making record earnings. The basic cost of the F-35, which is described by Pentagon budget watcher Winslow Wheeler as ‘the jet that ate the Pentagon’, increased to almost $400bn by April 2012, when its test programme was only 20 per cent complete. That is only the cost of acquiring the jet. Its operations and support will cost an additional $1.1bn, giving a conservatively estimated total cost of $1.5bn for a jet that is already almost ten years behind schedule and whose performance is described as ‘mediocre’.86

Amid these mind-boggling figures, a poll in May 2012 found that 62 per cent of Americans actually support reductions in the defence budget.87 Not that anyone on Capitol Hill was listening. In fact, in July 2012, Anne Elise Sauer, a former executive and lobbyist for Lockheed Martin, the company that won more than $33bn of contracts from the US government during 2011, was appointed Republican staff director at the Senate Armed Services Committee, one of the most important oversight positions in relation to military spending, including major weapons systems that are central to Lockheed’s business.88 That revolving door just keeps on turning.

In December 2011, the US finally pulled its last troops out of Iraq after nearly a decade of fighting, leaving a veritable army of US-paid contractors.89 In Afghanistan, meanwhile, roughly 80,000 troops are still deployed – a function of Obama’s decision to withdraw from Iraq to allow for greater troop numbers in Afghanistan. And for the deeply compromised outcomes in these conflicts, Americans have, as of August 2012, paid just under $1.4trn, in Iraq $805m and Afghanistan $554m.90 This shift in troop deployment also reflected the US’s intensifying use of assassination of its opponents by unmanned drones, in its perpetual war on terrorism.

As if to reiterate its über-dominant role in the global trade in weapons, the United States, while announcing record levels of foreign military sales, effectively pulled the plug on the international arms trade treaty being negotiated at the UN in July 2012, despite at least ninety countries wanting to sign up to an adequate, if not inspiring, draft text.91

If ever the world, with its democracy weakened and its people slaughtered and impoverished by an out-of-control arms trade, required what the deeply mourned Václav Havel described as the politics of the impossible – a politics not of calculation, intrigue, secret deals and manoeuvring, but of improving ourselves and the world – that time is now.

9 August 2012