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Merchants of death

The AgustaWestland VVIP chopper scandal has put the spotlight once again on the role of the middleman in the big international arms bazaar and also prompted a relook at the process of defence procurement, Shishir Gupta reports.

delhi Updated: Feb 24, 2013 00:59 IST
Shishir Gupta

In autumn 2010, AK Antony discovered that a Swedish Arms major, through a subsidiary, was offering vocational training abroad to one of his two sons.

Even though the company was one of the best in the world, the angry defence minister not only ensured that the trip was cancelled but also hauled his son over coals as the Swedish company was an active participant in the Indian defence market with interests in surface-to-air missiles and fighter planes.

The 72-year-old minister is angry again today as there is evidence of Indian middle-men getting 50.1 million Euros as bribes in the AgustaWestland VVIP helicopter deal signed in February 2010.

For a minister who prefers watching Malayalam TV channels closeted in his hotel room after meetings even during bilateral visits to countries such as Germany, Vietnam, Japan, US and South Korea, the allegation that a former Air Force Chief took bribes in the deal amounts to a personal betrayal.

Now not only does he want the bribe takers and givers in the deal punished, Antony also wants to revisit deals in the pipeline without a fig for complaining arms majors and their governments.

Unfortunately, the minister from his ivory tower failed to notice Air Force and defence ministry brass quaffing pink champagne with handpicked beautiful engineers at the chalet of a known defence dealer at the Bengaluru Aero Show this month.

Over 12 years ago, the Central Vigilance Commission in its classified report on “Investigations into Defence Deals” apparently wrote: “The ban on agents in the procurement of weapons and weapon systems as mentioned in the MoD circular No. 2250-B/JS(O)/89 dated 17.4.89 is, in effect, not a ban at all.

While in the entire spectrum of defence purchases, agents exist, only in the area of weapon and weapon systems, agents are banned.

But there are adequate inputs to come to conclusion that in spite of the ban, agents are active.” The situation is the same today and some of the middle-men mentioned by the CVC are still making hay as is evident from the magenta Lamborghinis and white Bentleys they drive.

It is not that India, the world’s largest arms importer with annual purchases of $8 billion, is the only country in the world that bans middle-men in defence procurement.

The US and Canada do not deal with middle-men either, with the threat of the Foreign Corrupt Practices Act hanging over arms majors dealing with other countries and their employees forced to sign integrity pacts.

However, countries like Japan, Malaysia, France, Ukraine, Indonesia, Nepal, Italy, Ghana and Israel do not ban middlemen or deal only through approved agents.

In India despite the Bofors, HDW and Scorpene bribery scandals, defence agents and middle-men act with impunity and continue to influence a majority of contracts.

Foreign defence companies do not shy away from seeking their services despite the ban and the current innovative route for dealers is to function under the garb of off-set companies, which takes advantage of the 30% off-set policy of the government in the new defence procurement policy.

Simply put, if India buys $100 million worth of arms from a foreign company, that company has to source 30% of the same product from the domestic market.

What is surprising is that the defence ministry cannot enforce the ban despite all arms agents being known to the Intelligence Bureau and the CBI, which puts these dealers in an “undesirable contact men” list circulated on Raisina Hill each year.

“The list of these dealers who prefer gold Rolexes, cigars, golf clubs and rare single malt whiskey, are upgraded and sent to the government from time to time but there is no action as a majority of them are politically connected and have a close nexus with back-benchers in the Parliament,” said a senior official.

An intelligence report on the murky world of arms dealers says that all defence agents, mostly located in New Delhi, keep a battery of retired service officers, retired defence PSU officials and bureaucrats who have effective links in the establishment, on their pay rolls.

The role of defence agents has become so vital that foreign contractors require their assistance at each of the 18 stages that are part of the procurement process.

Intelligence says agents get an upfront 3% of the tender value to convince the three services what system is most suitable for them and then push the foreign contractors for the specific tender.

Once payment is received, around 0.5% of it is spent on service officials related to the tender. With the defence budget touching Rs.1.53 lakh crore, these miniscule commissions translate into huge sums of money.

From fixing qualitative requirements or what is called acceptance of necessity before floating of tender, to submission of technical bids to crucial trial stage, the path to purchase is greased, according to intelligence, with defence agents paying as much as one percent to services for clearing field trials.

“Once the report of the technical oversight committee, where service officers are usually influenced, is accepted by the Director General Acquisition, a contract negotiation committee is set up under Joint Secretary to open the commercial offer and finalise with the lowest bidder. In big ticket tenders, the defence ministry asks for discounts of up to 10% which is often pre-manipulated,” said an arms dealer.

The problem of dealers is so acute in India that even government-to-government deals are not safe from influential lobbying and law firms.

Former Air Chief Shashi Tyagi was a director at one such firm, Williamson Global Advisors, dealing with strategic purchases.

The Vermas, Rishis, Nandas, Chaudharys, Khannas, Bhandaris, Guptas, Sahinis and Seths of this arms world are influential people with a perfectly legitimate front business and humongous reach into the corridors of power.

And arms majors have to go through them since the defence bureaucracy, from clerks in Sena Bhawan to the Service Directorates and the Ministry, have got corrupted over the years and there is no way out of this morass.

Russia, Israel, US, Canada, Switzerland, France, Germany, UK, Italy, Spain, Poland, Bulgaria, Czech Republic, Brazil, Slovak Republic, Sweden, Ukraine, Belarus, Singapore, South Africa and South Korea are nations active in defence business in India. Russia and Israel continue to be our top defence suppliers.

While Antony is in no mood to recommend legitimising agents in purchases, the government is looking at a three-year ban on service officers and defence officials seeking re-employment or even consultancy after retirement.

At present, there is a moratorium of one year for re-employment with no bar on consultancy. The off-set policy is being made less rigid and indigenous private players are being encouraged to cut down imports, which amount to nearly 70% of purchases.

The failure of the Defence Research Development Organisation to deliver on big ticket items, like the Light Combat Aircraft project to even an anti-tank missile for the army, has made India virtually reliant on foreign companies for high technology hardware.

With China militarily rising in Tibet, India is caught between a rock and a hard place where it must buy arms to stand up against the next super power but acquisition is delayed on account of a minefield in the form of dealers and agents.

Ban them or ostracise them, the dealers are here to stay.