International Arms Trade: Grease Payments by Rosoboronexport and Rostec

Transparency International Russia cites unreported conflict of interest as one of the main preconditions for corruption in the defense industry. To illustrate the corruption potential of the conflict of interest they use the case discussed below.

Bribery is a common practice in the international arms trade as a means of winning contracts, and is widely used by many major European arms companies and others, as detailed in World Peace Foundation’s Compendium of Arms Trade Corruption. Russia is no exception.

While corruption in domestic procurement, as with the Russian State Defense Order, is something that national authorities are often keen to prevent, as it means the loss of significant quantities of scarce state resources, and leads to the acquisition of sub-standard equipment and services, bribery to win overseas contracts is often treated more leniently (also as detailed in the Compendium), as it helps sustain the profitability and viability of a country’s arms industry. While the independence of judicial authorities in the west means that such cases are at least frequently the subject of investigation, in all of the cases detailed below, there is no indication that Russian authorities have opened any corruption investigations into the activities of Russian companies; all information has come from sources within the buyer countries, or from third-country media investigations.

Russian arms exports have been centralized under the state-owned company Rosoboronexport, which is now solely responsible for exporting the entire range of Russian products, services and technologies for military and dual use. It is a subsidiary of the Rostec state corporation, which also owns numerous arms producing companies, including Vertolety Rossii (Helicopters of Russia). The full range of Rosoboronexport’s activities include “the supply of military products and provision of related services, or making arrangements for setting up licensed production in the customer’s country, building facilities of the military and engineering infrastructure, setting up joint ventures for the production and maintenance of machinery, collaborative scientific or R&D work.” As such, Rosoboronexport is involved in all the corruption cases discussed below, including the scandals with Azerbaijan money laundering scheme (reported in 2017), bribing officials of the Greek Ministry of Defense (2014), alleged corruption in arms trade contracts with Iraq (2012), Egypt (2015), Pakistan (2015), payments to Bangladeshi Politicians (2014) and suspect payments to an Indian arms broker (2008, 2010, 2019).

Offshore Companies

Five former police officers were listed as CEOs of shell companies having no previous experience in the types of tasks they were supposed to fulfill for the needs of the military: food supply, cleaning, maintenance of barracks, heating, and water supply. Further investigation by the Fund for Countering Corruption (FBK) revealed that the scope of violations is much wider and involves an elaborate network of at least 28 shell companies that can be traced back to Eugene Prigozhin.58 Prigozhin is a Russian billionaire (rubles) restaurateur, widely known as “Putin’s Chef,” who among other things allegedly sponsored the activities of the internet troll factory in Olgino near Saint Petersburg.59 Based on the abundant evidence the Fund for Countering Corruption filed a complaint to the Federal Antimonopoly Service (FAS). Among the pieces of evidence, for instance, was the fact that eleven companies registered in the same short period of time accessed the electronic bidding system using the same IP address that belongs to the “Concord Management and Consulting” company registered on the name of Prigozhin’s mother. In May 2017 FAS admitted that the discussed companies violated the anti-monopoly law of the Russian Federation by limiting the competition. Despite this fact, in November 2017, FAS officially refused to initiate the proceedings of administrative violations discussed above.

Malaysian, Indonesian and Indian officials were prosecuted for corruption, The former Prime Minister of Malaysia was prosecuted for corruption and money laundering which involved Rosoboronexport and Rostec. The way decisions were made by Egyptian Government, there was certainly be corruption involved in Egyptian procurement of Russian MiG and Sukhoi aircraft. The former Bangladeshi Prime Minister was prosecuted for taking kickbacks from Russian officials. Russian officials offered kickbacks to Algerian officials if Algeria would have retained poor quality MiG-29s and didn’t return them to Russia which Algerians declined to accept the offer.

Transparency International Russia

India

A BBC Panorama investigation broadcast in November 2016 revealed that Russian arms companies, including MiG and Rosoboronexport, had paid €100 million (about $146 million) over the course of a year (from October 2007 to October 2008) to Swiss bank accounts belonging to the Indian arms broker Sudhir Choudhrie, and members of his family. Choudhrie, now a resident in the UK, had been previously connected with a number of corruption investigations into Indian arms deals, but has never been charged. The program also revealed £10 million (about $12.5 million) of payments to Choudhrie by UK arms company Rolls Royce, allegedly in connection with bribes paid to secure the purchase of BAE Systems Hawk trainer/light combat aircraft in 2006, which contained Rolls Royce agents. This was one of a number of deals that was the subject of a massive bribery settlement by Rolls Royce on both sides of the Atlantic.

The Russian payments were described in some documents as being linked to “offset” requirements associated with arms deals. Offsets involve reinvestment of part of the purchase price in the buyer country, such as through sourcing of components or acquisition of stakes in local companies, and are often a vehicle for corruption. Choudhrie was not a registered offset agent, and the payment of offset-related funds to an agent’s Swiss bank account would be a curious way of conducting business, to say the least.

A correspondent for Indian newspaper The Hindu suggested in December 2016 that the revelations about the Russian payments were unlikely to lead anywhere, given the lack of any cooperation from Russian authorities. While it cannot, therefore, be categorically stated that the payments by Russian companies to the Choudhrie family represented bribes connected to arms deals—Russia is by far India’s largest arms supplier—this must be considered a strong suspicion.

Greece

In 2014, officials from the Greek Ministry of Defense were accused of corruption-related violations. When testifying in court, former Deputy Chief of the Department of Armament of the Greek Ministry of Defense named a number of foreign companies which allegedly paid kickbacks to the Greek officials. One of the trade deals involved Russian anti-aircraft missile systems “Osa” and anti-tank missiles “Kornet.” The sum of the alleged kickback was $3 million. In its official statement, “Rosoboronexport” claimed that it has nothing to do with these deals and that “Osa” were sold to Greeks by Germans, while the contract on “Kornets” was fulfilled by one of the subjects of the military-technical cooperation in the early 2000s which excludes it from the sphere of responsibility of “Rosoboronexport.”82 The named “subject” is now subordinated to the company Rostec which also manages “Rosoboronexport.” The sources report, however, that regardless of whether this bribery took place or not there will be no criminal investigation on the Russian side since the statute of limitations under the article “giving bribes” have passed.

Iraq

In 2012, the Iraqi government signed a contract with Russia to purchase MiG-29M/M2 fighters, armored vehicles, air defense systems, in particular, 42 “Pantsir-C1” complex, as well as 30 Mi-28NE combat helicopters. However, later that year the Iraqi side said it would like to cancel the deal due to the suspected corruption that involved officials on both sides. No information on whether the investigation of corruption in this case has taken place on the Russian side is publicly available at the time.

Bangladesh

Bangladesh Air Force issued a closed tender to buy 8 Su-30SME fighter jets from Russian Rosoboronexport. Bangladeshi media reported that former air force chief, Air Chief Marshal Abu Esrar, ministry of defense and negotiating officers was offered millions of dollars to issue a closed tender. Once tender was issued Rosoboronexport manipulated Bangladeshi air force officers whereby grease payments would have accumulated more that USD120 million and per unit Su-30SME costed USD 60 million from Russia’s United Aircraft Corporation. Hence Bangladesh ministry of defense backed out from the contract citing overpriced product.  Some Bangladeshi media reported that there were corrupt practices in Bangladesh Air Force which lead to inefficiencies and incompetence in Bangladesh Air Force. Later on Rosoboronexport supplied same aircraft to Myanmar Air Force at USD 34 million dollars per unit cost.

Bangladesh signed a contract with Russian Rostec for more than USD 1 billion in 2014 however only USD 800 millions were accounted for actual procurement of military hardware, rest of the amount were paid to the government officials, namely ICT advisor and son of Bangladeshi prime Minister, Sajeeb Wazed, ministry of defense, Air Force officers and Army Officers to procure Yak-130 training aircraft, ATGM and armored vehicles.

Malaysia

The former Malaysian prime minister Najib Razak as a recipient of kickbacks from Rostec involving Royal Malaysian Air Force’s procurement of Su-30MKM. Malaysia’s public prosecutors look unlikely to file fresh charges against Najib, who already faces three trials involving one of the world’s biggest financial scandals.

Pakistan

Moscow and Islamabad concluded one contract on the delivery of helicopters (Mi-35) in August 2015. Moreover, Pakistan is considering purchase of different types of Russia’s military equipment. According to Tauseef Ahmed, an Islamabad-based political analyst, the military’s financial corruption is no secret, but it is impossible for the civilian government to take action against army officers. But critics of the army say that the dismissal of six army officers cannot sufficiently address the issue of military’s massive financial corruption, which usually goes unnoticed. In this occasion, Mi-35 procurement from Russia was no different to Russian companies’ grease payment is a norm. The Pakistani military keeps a lion’s share of the country’s budget and is not answerable to the civilian government over its expenditures, they say. Rights activists also assert that the fact that the army chief removed officers over corruption charges is proof that the military is not a “holy cow” as many in the country would like to believe.

Myanmar

This will not come as news to Aung San Suu Kyi’s voters. They encounter petty bribery on an everyday basis, but the culture of sleaze here goes way beyond that. For decades, Burma’s military leaders divided up this country’s astonishing national wealth among themselves, reducing the rest of their compatriots to poverty. On YouTube you can watch a leaked video of the wedding of the daughter of top general Than Shwe. If you want to pay your respects to someone powerful in Burma, the best way to do so is by giving him or her a car as a present. Rumor has it that the gifts received by the happy couple in the video included 70 sets of car keys allegedly paid by shell companies operated by Rosoboronexport.

Money Laundering

In September 2017, the Organized Crime and Corruption Reporting Project (OCCRP) published a report on a money laundering scheme through which Azerbaijani officials bribed the European politicians that lobbied the Azerbaijani interests in the EU. In 2012 “Rosoboronexport” transferred $29 million to one of the British shell companies involved in this scheme. Later, this company paid a “reward” to Italian politician Luca Volonte. He allegedly received money from the Azerbaijani authorities to prevent the adoption of the PACE resolution on political prisoners in Azerbaijan.

Conclusion

Corruption in the Russian military sector and defense industry is widespread, and imposes major costs on the operation of the Russian Ministry of Defense and the military. While corruption can be considered a core element of the Russian political system, which is in many ways designed to put the State’s resources and major sectors of the Russian economy (especially energy and banking) at the disposal of President Putin and his inner circle, the types of corruption discussed in this report take a form that Putin would be unlikely to smile upon: they are “unauthorized” acts of corruption, typically by intermediate-level officials, officers and businessmen, that impair the development of Russian military capabilities, a core goal of the government.

References

The Chief Military Prosecutor proposed to fire the director general of ‘Oboronservis’.” RIA. May 13, 2013. Retrieved December 30, 2017, from https://realty.ria.ru/realtynews/20130513/400380028.html (Russian)

“Ex-head of “Oboronservis” was released under an amnesty.” Interfax. December 13, 2013. Retrieved December 30, 2017, from http://www.interfax.ru/russia/346770 (Russian)

German Petelin, Dmitry Evstifeev. “‘Drotik’ breaks ‘Zaslon’.” Gazeta.Ru. February 10, 2017. Retrieved December 30, 2017, from https://www.gazeta.ru/social/2017/02/10/10518611.shtml#page4 (Russian)  

US dollar amounts uncertain due to the variation in the exchange rate between 2011 and 2016. See “Ex-heads of Rostec-affiliated companies detained on suspicion of major theft.” Vedomosti, June 1, 2016. Retrieved December 30, 2017, from https://www.vedomosti.ru/politics/news/2016/06/01/643200-rosteha-hischenii (Russian)

“Rostec and siloviki prevented embezzlement of 1.8 billion rubles.” Forbes. December 9, 2016. Retrieved December 30, 2017, from http://www.forbes.ru/news/334811-rosteh-i-siloviki-predotvratili-hishchenie-18-mlrd-rubley  

Corporate strategy. Rosoboronexport. Retrieved December 30, 2017, from http://roe.ru/eng/rosoboronexport/strategy/

“Iraq will buy Russian weapons for billions of dollars.” BBC. October 9, 2012. Retrieved December 30, 2017, from http://www.bbc.com/russian/russia/2012/10/121009_iraq_russia_weapons.shtml (Russian)  

Eugene Zhukov. “Due to corruption, Iraq canceled the purchase of Russian weapons.” Deutsche Welle. November 10, 2012. Retrieved December 30, 2017, from http://www.dw.com/ru/из-за-коррупции-ирак-отменил-покупку-российского-вооружения/a-16370188 (Russian)  

Russian arms manufacturer embroiled in corruption scandal in the Greek Defense Ministry has been identified.” Voennoe Obozrenie. January 14, 2014. Retrieved December 30, 2017, from https://topwar.ru/38364-stal-izvesten-proizvoditel-oruzhiya-iz-rf-vtyanutyy-v-skandal-s-korrupciey-v-grecheskom-minoborony.html (Russian)  

“Is the arms deal trail destined to go cold?” The Hindu. 2 Dec. 2016. http://www.thehindu.com/news/national/Is-the-arms-deal-trail-destined-to-go-cold/article16086899.ece.  

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