Dubious Defense Deal Bribery Allegations Cloud German Ship Sale to South Africa

Prosecutors in Germany are investigating allegations that a German shipbuilding consortium paid bribes to South African officials to win a major defense contract. Internal documents have reinforced suspicions of corruption.

By Georg Bönisch and

German-made MEKO corvette patrolling the coast of South Africa.

German-made MEKO corvette patrolling the coast of South Africa.

When German state prosecutors traveled from Düsseldorf to Hamburg last November, there was no need to ask for directions. They were already familiar with the city's large and confusing port area.

The investigators had visited the headquarters of German shipbuilder Blohm + Voss last summer. And just as before, they had a search warrant concerning a defense contract with South Africa dating back to December 1999.

At the time, the African country ordered four corvettes from the German Frigate Consortium (GFC), which includes Blohm + Voss, Howaldtswerke Deutsche Werft AG (HDW) and Thyssen Rheinstahl Technik (TRT). The deal for the MEKO A200 corvettes was worth around €350 million ($454 million).

Prosecutors have been investigating the deal for the best part of a year due to suspicions of tax evasion and bribery. TRT listed a sum of $25 million in its balance sheet under the item "Useful Expenditures" related to the contract. German companies often used that term to describe bribe payments made abroad which they set off against tax, a practice that became illegal in February 1999.

The accusations of improper conduct now stretch all the way to the top of the former management of the firms involved, including an ex-board member of ThyssenKrupp and a former manager of the Blohm + Voss shipyard.

The paper trail leads half way around the world: from Germany to South Africa, from London to the Liberian capital Monrovia. The prosecutors believe they've found documents backing up suspicions that the German shipbuilders won the South African contract with the help of kickbacks

Mysterious $3 million payment

And while the German public is currently preoccupied with the shroud of corruption enveloping electronics giant Siemens, several internal memos appear to document how employees of the shipbuilders held unofficial talks with the head procurement officer of the South African military. The high-ranking bureaucrat allegedly demanded a payment of $3 million at those meetings and in 2000 that sum was indeed transferred to a front company in London.

A spokesperson for ThyssenKrupp said there could be "no further information given regarding the situation" in light of the ongoing investigation, but the company had a "high interest in a complete clarification." An internal committee was conducting its own inquiry into the charges "with the help of external experts" and there was "comprehensive" cooperation with prosecutors.

The corvette deal looks like an example of what is common practice in major international deals where business meets politics. It leads into a shadowy region where it's often difficult to decide which side is seducing which.

The origins of the deal go back to 1993, as the end of Apartheid and of the international weapons embargo on South Africa were both in sight. The country's navy decided to make arrangements for the purchase of four corvettes. The project "Sitron" survived Nelson Mandela's election victory in 1994 and shortly thereafter defense contractors the world over -- including the German consortium -- began scrambling to win the lucrative deal. By December 1994, the Germans' hopes had already been dashed as the number of countries still in contention was cut from five to two -- with only Britain and Spain still in the running.

But the German consortium made a surprise return to the circle of bidders only four weeks later, when Mandela's then deputy and current South African President Thabo Mbeki announced during a January 1995 visit to Germany: "The race is still open." And in September 1997 the South Africans started a complex tender process for one of Africa's biggest ever defense contracts. The country's armed forces were now looking to buy not only warships, but also submarines, helicopters and airplanes in five separate contracts. By the end of 1999 the military had purchased around €5 billion worth of European weapons systems -- a deal that has divided South Africa for years.

The investigation by the German prosecutors is likely to deepen the controversy. Allegations of corruption have plagued the South African defense tender since 1999, even though suspicions have not been directed against the German consortium until now. That's partially due to the special nature of the deal: the foreign defense contractors agreed to allow South African firms to participate in the production of the weapons systems.

Allegations against ADS executive, Zuma

Until recently, investigators had focused their efforts on the German consortium's South African partner Africa Defense Systems (ADS). In 2005, a court sentenced ADS head Shabir Shaik to 15 years in prison for corruption offenses and other charges. The businessman was also the "financial advisor" to Jacob Zuma, who was vice president of South Africa until 2005. Shaik allegedly channeled the equivalent of several hundred thousand euros to Zuma so that he would obstruct corruption investigations into the defense contracts, among other things. Despite all of the allegations, Zuma is considered one of the leading candidates to become president in 2008.

Former South African Vice President Jacob Zuma allegedly received payments to obstruct corruption probes. He is regarded as a contender for the presidency in 2008.

Former South African Vice President Jacob Zuma allegedly received payments to obstruct corruption probes. He is regarded as a contender for the presidency in 2008.

Shaik's name also appears in German documents. While it's understandable that the managers of the German consortium held several meetings with the head of their African partner, there are also indications that the Germans had contact with two brothers of Shaik. In May 1998 Shamin "Chippy" Shaik, a director at the South African Defense Ministry, was named Chief of Acquisitions. His new position gave him key influence on the tender process and procurement decisions.

According to the shipbuilding consortium's internal memos, which are now in the possession of prosecutors, the German bidders had unofficial contacts with Chippy Shaik in 1998. The managers even documented with Teutonic efficiency the sensitive nature of the meeting. Chippy allegedly demanded payment of $3 million to ensure the success of the German bid for the contract. He supposedly even named a middleman: Ian Pierce. The South African businessman holds a stake in a firm called Futuristic Business Solutions (FBS). The company has been linked to allegations of corruption in South Africa for years. And FBS also happens to have a stake in the German consortium's partner ADS.

The German Frigate Consortium needed all the help it could get during the tender. A joint inquiry by the South African anti-corruption authority, the country's accounting office and the attorney general concluded that the shipbuilding consortium and two other firms shouldn't even have made it through the first round of the tender. The Germans failed to meet several requirements right up until June 1998. And yet they still won the bid.

On July 27, 1998, German managers from the consortium traveled to South Africa for three days. Following his return to Germany, the responsible Thyssen executive noted in a memo the nature of his confidential talks with Chippy Shaik. Among other matters, the $3 million bribe was allegedly discussed during the meeting. And indeed, in the same year a lobby agreement for that sum was forged with the front company Merian Ltd. in London. Ian Pierce allegedly acted as its representative.

As the South African government's fiscal year took effect on April 1, 2000, the contract became valid and the first payments for the corvettes were made to the German shipbuilding consortium. The front company received $3 million from the Germans in the same month. Neither Shaik nor Pierce responded to telephone and written requests for a comment last week.

The episode may be beyond the statue of limitations for criminal legal action in Germany. And a ThyssenKrupp spokesperson is confident "that the allegations of improper commission payments will not be proven in the course of the prosecutors' investigation." But the inquiry is not yet finished and there is evidence of further payments to several people, firms and foundations in South Africa. By October 2001, a total of $22 million had been paid to a single company in Monrovia, Liberia.

Despite the investigation and allegations, the warship deal remains afloat. The contract for the four corvettes even has an option for the purchase of a fifth ship. Klaus Borgschulte, head of the Thyssen shipyard group, even sees "clear signals that the South African navy and defense ministry are very interested in exercising that option."

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