The Scorpions are probing whether part of a R100-million sweetener paid to a Saudi Arabian agent by arms manufacturer Denel has flowed back to South Africa in the form of kickbacks.
Possible recipients included in the inquiry are former directors and officials of Denel, the late defence minister Joe Modise, the African National Congress, and well-known ANC fund-raiser and a confidant of Nelson Mandela, Yusuf Surtee.
Denel paid the money in advance as a “commitment fee” for a deal that never happened. The arms parastatal had hoped to sell weapons worth billions to the undemocratic Saudi regime.
The highly unusual payment was approved in 1996 by the Denel board, then headed by Absa deputy chairperson Dave Brink.
The facts of the case suggest Denel directors should have known they were authorising a deal that was inherently corrupt; conceived to influence decision-makers in Saudi Arabia. Brink denies this (see “What they had to say” below).
The R100-million payment, later written off as “marketing costs”, has returned to haunt Denel even as it battles with a leadership and financial crisis.
Denel transferred the money in three tranches between June 1996 and January 1997 to a Swiss account associated with the Saudi agent. It totalled $22,5-million — R100-million at the time, but R140-million today.
Now the Scorpions want to know if there were any local inducements to pay this advance.
Details of the criminal investigation have emerged at this point because of a desperate legal battle by Denel’s Saudi agent to prevent the Scorpions from gaining access to his Swiss banking records.
Those records were obtained by Swiss authorities in 2002 and forwarded to the South African Department of Justice and Constitutional Development the following year. But they remain sealed pending the outcome of local court proceedings.
The agent, Contract Advisory (then acting through a sister company, Zan Trading) lost Swiss court appeals against the disclosure. But Contract Advisory has continued local legal action that is due to be heard in the Pretoria High Court on June 3.
The deal to sell South African artillery systems to the Saudis, touted to be worth about $1,4-billion (now R8,6-billion), was pursued by Denel for nearly 10 years, but never materialised.
The sale was conceived in 1992 in the aftermath of the first Gulf War when
it became known that the Saudis were in the market for howitzers. Denel’s famed G5 and G6 cannons were out of bounds until the advent of democracy in 1994.
In September 1994 Denel signed an agency agreement with Zan Trading president Esam Hakeem, a man known to be close to some of the Al-Saud princes who control the oil-rich kingdom. Hakeem and Contract Advisory were to market Denel products to the “military and para-military forces” of Saudi Arabia.
That signalled the start of years of lobbying and Saudi-South African exchanges — not only involving Denel officials, but also then-defence minister Modise, his Cabinet colleagues responsible for public enterprises and energy, as well as President Thabo Mbeki and Mandela.
During this time, according to several sources, Hakeem also cultivated close relations with Modise and other South African political heavyweights.
In 1996, the Denel board was told the $22,5-million “commitment fee” would clinch the deal. They paid, but the Saudis never finalised the promised arms bonanza.
In February 2001, when Saudi-controlled Cell C was finally awarded South Africa’s third cellphone licence, hopes were raised again at Denel. But the expected announcement of an arms deal during Mbeki’s subsequent state visit to Riyadh never happened.
In 2002, having repeatedly delayed their investigation to give the deal a chance, the Scorpions finally started to follow the money.
Their first port of call was Contract Advisory’s Swiss bank account, to which Denel had paid its “commitment fee”.
The payout was especially controversial because it happened before any arms contract was signed, and because it allegedly contravened Denel’s own rules. These generally provide for payment of commission only once the principal sum has been secured.
The advance payment also appeared to be in addition to the agreed commission — already a whopping 26% on the value of the deal.
That percentage — more than a quarter of the selling price and high even by arms trade standards — should have conveyed a simple message to the Denel board: an enormous amount of cash was to be distributed as kickbacks to Saudi decision-makers.
In fact, special prior permission had to be obtained from the South African Reserve Bank for such a large percentage of the selling price to be re-exported as commission.
When the deal failed, the Denel board was forced to write off the $22,5-million as “marketing costs”. By then their own auditors, PricewaterhouseCoopers, had already alerted the auditor general who, in turn, referred the matter for criminal investigation.
In their application to the Swiss authorities for legal assistance in tracing the money, the Scorpions were scathing about the payment of an upfront “commitment fee”.
Citing the terms of the original agency contract between Denel and Contract Advisory, the application noted: “The only remuneration to which the agent was entitled was an all-inclusive consultancy fee of 26% of the contract value …
“Denel has a fixed policy not to pay any form of commission not having received cash prior to the payment thereof. The decision to effect payment of the R100-million constitutes a gross deviation from this principle.
“Denel paid over R100-million without any warranty, in any form whatsoever, that this would lead to the conclusion of the contract. It appears that both the money and the interest on it might have been lost …
“It is simply unacceptable that no better explanation as to the destiny of the money could be presented.”
The document also noted: “This office has evidence under oath to the effect that some of the funds paid as ‘commitment fees’ might have found their way back into the Republic of South Africa as a ‘kickback’ to some officials of Denel and/or to some other parties (presently unknown).”
Despite the “presently unknown” rider, the Scorpions document lists more than 20 individuals and entities in South Africa — including the ANC, Modise, Surtee and each then-director of Denel — and asks whether Contract Advisory’s Swiss bank is aware of any payments to them.
Both Contract Advisory and Brink suggest the commitment fee was for legitimate lobbying expenses. But in an affidavit before court Scorpions investigator Gerhard Nel points out that in terms of the original agency contract, any amendments — such as an upfront payment — had to be made in writing to be valid. This was never done.
Several sources close to the deal say the understanding was conveyed to Denel that a commitment fee was demanded primarily for the benefit of the Saudi decision-makers, not for Contract Advisory.
When the deal failed to materialise and relations became strained with Hakeem, he told Denel he was “just the messenger”, said one source.
Indeed, the request for the fee was allegedly tied to at least one other condition that had no direct connection with Contract Advisory: a demand that South Africa source more oil from Saudi and less from Iran. There is evidence that the South African authorities acted on this demand.
In addition, two sources suggested the new conditions (including the commitment fee) presented to the Denel board were not even initially conveyed to Denel by Hakeem.
They said they understood that the initial communication came from Surtee.
Hakeem was then summoned to explain the new conditions.
Surtee’s role in the saga is unclear. It is known that he was involved in raising money for the ANC from the Saudis, who regarded him as Mandela’s personal envoy.
His role as an agent of influence for the French arms company, Thales, during South Africa’s own 1998 arms deal has recently emerged from evidence at the Schabir Shaik trail.
It is known that in December 1995, when Modise and Denel officials were invited to Saudi Arabia to discuss the arms deal with the Saudi defence minister, Prince Sultan, they found Surtee was already there, though he was never part of the formal discussions.
Surtee himself is coy about his exact role, but denied conveying the “commitment fee” request to Denel. He told the Mail & Guardian: “I never received any money. I’m relaxed about the investigation.”
What they had to say
Denel spokesperson Sam Basch: This matter was investigated by forensic auditors appointed by the then minister of public enterprises, [Stella] Sigcau, during or about August 1997.
It was subsequently referred to the then OSEO [Office for Serious Economic Offences] and an investigation was launched. Denel to date has not received any communication on the outcome of the investigation. Denel supplied the OSEO and [the Department of Public Enterprises] with information as available at the time.
Under the circumstances we are not in a position to comment, other than confirming the fact that to our knowledge, the matter is being or was investigated.
Yusuf Surtee, arms fixer and Mandela confidant: I never received any money. I’m relaxed about the investigation.
Dave Brink, former Denel chairperson: I obviously cannot divulge to you any knowledge I might have of board deliberations during my period as a director, but can try to give you some guidance …
Does 26% [the commission agreed to with agent Esam Hakeem in 1994] not seem so high as to suggest that the Denel board knew, or should have known, that the intention was … to bribe decision-makers in Saudi-Arabia?
The intention was to fund the marketing and tendering to supply an extremely complex military system, in competition with different systems offered by competitors from major industrial countries, where typically the marketing period could be expected to last for a number of years.
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A partner or commission agent in a target foreign country would … have to establish a team with extensive technical, commercial, administrative and legal capabilities and would have to disburse large sums for travel, inspections and demonstrations and have knowledge of and attend to questions put by the client about the systems Denel was offering as well as being knowledgeable about those being offered by competitors.
Presentations and briefings would need to be made at many levels within the military establishment and to decision makers in government.
Does the upfront payment [of R100-million in 1996] for a contract that had yet to be finalised not seem so unusual as to suggest that the Denel board knew, or should have known, that the intention … was to bribe decision-makers in Saudi Arabia?
Marketing and tendering costs are by definition “upfront” and have to be made without any certainty of winning a contract.
Are you aware of any part of this … payment having benefited any then-director of Denel, or any other person?
No, I am not aware … other than persons who would have properly benefited in terms of the contract.
ANC spokesperson Smuts Ngonyama: The ANC has no knowledge of this matter. The law must take its course
Kenneth McKenzie, a director of Contract Advisory Limited (from court affidavit): The transaction envisaged in the [1994] agreement was enormous, involving hundreds of millions of rands.
Subsequent to the conclusion of the agreement, [Contract Advisory] had expended an enormous amount in order to broker the transaction. It further became evident that [Contract Advisory] would have to incur tremendous additional expenditure in order to broker this transaction …
Requests were forwarded to Denel on two occasions to supplement the agreement to make provision for a commitment fee payable by Denel to [Contract Advisory] before the conclusion of the transaction with the Saudi Arabian authorities.
These requests were fully motivated and were considered by the board of directors of Denel … Denel agreed …
I may add that payment of a commitment fee in transactions of this nature is in no way extraordinary and one finds it in many of these transactions …
Although the deal between Denel and the Saudi Arabian authorities had been properly brokered by [Contract Advisory], a final deal between these parties has not yet been concluded. [This] is due to facts totally beyond the control of [Contract Advisory]. Suffice to say that it was for political reasons involving sensitive matters of an international nature.
At the time of going to press, Esam Hakeem, who was travelling, failed to answer detailed questions. His United States partner, Ed Aguanno, confirmed that the questions had been forwarded to him.