BVI Offshore Business: Grey Area

Upon investigation made into the network of BAE Systems companies, the U.S. State Department has placed a “temporary administrative hold” on weapons export licenses of BAE Systems or companies using BAE Systems’ products. This came when the BAE pleaded guilty on March 1 to accusations that it conspired to defraud the U.S., and agreed to pay a $400 million fine in a complicated case involving allegations of mysterious payments paid to a Saudi Arabian official, offshore “shell companies”(including BVI companies) set up by BAE to get weapons contracts, and providing false information about this to the U.S. government.

According to the Justice Department, the company paid 135 million pounds and more than $14 million to a shell company registered in the British Virgin Islands, “even though in some situations the company was aware there was a high probability that part of the payments would be used to ensure that BAE was favored in foreign government decisions regarding the purchase of defense articles.”Also, according to the U.S. arms trade experts, the BAE payments apparently undermined the competitive ability of U.S. companies.

Justice Department lawyers said that none of the company’s criminal conduct involved BAE Systems Inc., which is the U.S. division of the defense company. However, the temporary hold applies both to BAE Systems, Inc. and to BAE Systems PLC, while the department studies the guilty plea and determines whether additional action should be taken against the company.

Further investigation is to be made into the network of companies (including BVI-registered entities) linked to African National Congress , as well as into a great number of industrial offset programmes that have become a good ground for corruption. It is suggested that recent closure of the Directorate of Special Operations (the Scorpions), which investigated organised crime and corruption in South Africa, was connected to their work on the arms deals with the British defence company and arms manufacturer BAE Systems.

Two months before their closure they launched a series of simultaneous raids at seven locations in three South African provinces, all of them related to the bribes paid by BAE Systems and related to the South African deal. The search warrants, obtained on suspicion of racketeering, corruption, money laundering and fraud, identify three sets of suspects associated with corruption in the deal. The first of them is BAE, its officials and front companies, including its head office marketing services and the BVI-registered Red Diamond, others include middlemen, among them the shady Zimbabwean businessman John Bredenkamp, and unnamed officials and agencies of the South African government.

Actually, the seach warrants were supported not only by evidences found by the Scorpions but also from the evidences found by the Serious Fraud Office (SFO). One of the warrants stated that there is a “reasonable suspicion that BAE devised a system of payments… designed as bribes to achieve success… and to seek to obtain undue advantage over its competitors in the bidding process”.

The SFO suspects that BVI-registered Red Diamond was created with the purpose to ensure that corrupt payments could be made, and to make it more difficult for law enforcement agencies to penetrate the bribes system. Also, according to the SFO investigation, payments to some middlemen were made through BAE itself, a South African company established by BAE and Saab to manage their offset obligations, the BVI-registered Arstow Commercial Corporation, and the Jersey-registered Commercial Corporation International (CIC).

German prosecutors are investigating the case of alleged bribery at German truck maker MAN AG. In connection with this case, more than 100 people are already under investigation, and two were arrested last week. They are alleged to have paid “bribes characterized as commission payments” to employees of MAN customers, sometimes via the accounts of relatives and friends, they said in a statement.

Munich prosecutors who launched the investigation and searched MAN’s offices last week, said they suspect that a “system to boost sales of trucks and buses” took place in Germany, and kickbacks were paid to promote sales of MAN trucks and buses in many countries.
The persons arrested and suspected are said to have funneled the money via front companies in the British Virgin Islands, Malta, the Bahamas, Cyprus, London and New York, or paid cash to crooked buyers to induce orders. The bribes were often paid to relatives or friends of purchasing executives, and had the purpose to secure sales of big amounts of heavy vehicles to big organizations.

The scheme is suggested to have worked from 2002 till 2009, longer than the 2002-2005 period mentioned last week. It was said that the total amount of  the payments abroad was 13 mln euros,  1 milion was paid inside Germany.

The allegations of bribery at MAN follow a high-scale corruption scandal at Siemens, which took place last year and was connected with making dubious payments to secure business. However, it was said by the spokesman for Munich prosecutors that the proceedings of this company cannot be compared with the Siemens proceedings by their scale.

In its turn, Munich-based MAN has said that it will give its full support to the investigation, and informed that its policies specifically prohibited the payment of bribes. An internal audit two years ago found irregularities regarding payment transactions in individual cases. MAN Group has announced it is co-operating with the inquiry, and none of the current members of MAN’s management board were among the suspects.