Were the payments illegal? How were they discovered? Is this a potential scandal in the making? The Wire breaks it down.
New Delhi: A number of foreign defence firms – the most notable of which include UK’s Rolls-Royce and Russia’s MiG – have paid hundreds of millions of dollars to companies linked to notorious Indian arms dealer Sudhir Choudhrie, according to an investigation by the BBC and The Guardian.
Choudhrie, who along with his family in 2002 founded a global business empire that dabbles in everything from aviation to healthcare, has been investigated by the Central Bureau of Investigation and the Enforcement Directorate for his alleged role in various artillery gun contracts and the Barak missile scandal of 2006.
Although not confirmed, some of the money transfers may have been done by specific defence companies in order to capture a number of Indian defence deals including the Rs. 6,600 crore-purchase of 66 Hawk advanced jet trainers in 2006 from BAE Systems (Rolls Royce manufactured the engines).
Much of The Guardian’s and BBC’s investigation, the results of which were shared with The Hindu and Economic Times, centres around three primary sources: People within the Rolls Royce, a 2008 risk management report by a private banking division of Credit Suisse and finally certain documents discovered among the Panama Papers.
What do information do these three sources tell us? When did these defence companies Choudhrie? Is this a scandal in the making? The Wire breaks it down.
Why did Credit Suisse create a report in 2008 and what does it indicate about payments made to companies linked to Choudhrie and members of his family?
Sometime in 2007, Clariden Leu, which was at the time a private banking division of Credit Suisse, grew suspicious over the money transfers made between various group companies of the Choudhrie family. More specifically, the money transfers between the Choudhrie family group companies sparked an anti-money laundering alert at Credit Suisse.
Because of this, Credit Suisse started investigating and analysing “18 account relationships” and scanned the money transfers between various Choudrie group firms. Most of the accounts, according to the investigation, were either jointly or individually in the name of Bhanu Choudhrie (Sudhir Choudhrie’s son) and Aman Chopra (Bhanu’s cousin).
What did the Credit Suisse analysis show? Basically that between 2007-2008, the Choudhrie’s family companies were paid “almost 100 million euros” by various Russian defence firms. Three group companies figure prominently – Cottage Consultants Ltd, Belinea Services Ltd and Carter Consultants Inc – and all of them have Bhanu Choudhrie and Aman Chopra listed as either directors or shareholders.
According to the BBC/Guardian investigation, Cottage Consultants received 28.1 million euros from Rosonboronexport (a Russian govt entity through which most Indo-Russian military deals are routed) and 4.7 million euros from MiG Corporation (supplier of Indian military aircraft).
Belinea on the other hand, received inflows of 60.88 million euros and outflows of 23.6 million euros since October 1st, 2007.
Is it illegal, the money paid by Russian defence companies to these Choudhrie group firms?
This is not clear at the moment. The BBC investigation doesn’t say if the Credit Suisse took any action against the three Choudhrie family group firms.
The leaked report, however does describe the Russian payments as “incoming funds from clients offset business”. Offsets, which are a major component of any significant Indian defence deal, is the term used to describe the percentage of a purchase/contract that is to be invested in India either directly or through the sourcing of parts.
However, as The Hindu notes, “neither Choudhrie nor any of the firms linked to him are approved arms agents or offset agencies in India. Nor has there been any defence deal that India has signed in which offset payments were routed through tax havens.”
It should be mentioned here that in other Indian defence deals that have had some element of corruption, most notably the AgustaWestland scandal, payments to middlemen were described by the Italian court judgement as ‘offset payments’.
The Choudhrie payments, therefore, could potentially call into question any deals that were made by these Russian defence firms from in the immediate years after 2008. In early 2010, nearly 20 MiG fighters were purchased by India for a little over $1 billion.
What about Rolls-Royce, the BAE Hawk deal and the leak from the UK engine manufacturer?
Multiple sources within Rolls-Royce have told The Guardian and the BBC that the Choudhrie family and their companies had worked with Rolls Royce during the massive Hawk deal, which involved India buying engines from Rolls-Royce and BAE-produced planes.
More specifically, one Rolls-Royce source told the media houses that “millions of pounds of Rolls-Royce money [nearly 10 million pounds] went to the Choudhrie family. “You had to work your way and it took time,” one source told The Guardian. “We needed to have Indian partners or a sister company in India.”
One specific incident that is highlighted is a trip that Bhanu Choudhrie allegedly took to Geneva with former BAE executive Peter Ginger in 2007. Ginger, as it happened, was a “key negotiator on the sale of Hawk aircraft” to India.
During this Geneva trip, Ginger apparently “deposited hundreds of thousands of pounds in cash into a Clariden Leu account from another account he held”. This account, in 2008, held about 1 million Swiss francs.
The Choudhrie family has denied all allegations. In a statement, lawyers for the family have said that “our client has no knowledge of what bank accounts have been set up or operated by Ginger or what sums (if any) he has deposited in them cash. Mr. Choudhrie did not pay any bribe to Ginger”.
Are middle-men for defence contracts illegal in India? What can we expect next in the Choudhrie case?
In India, partly due to our controversial and scandal-prone past with military equipment acquisitions, middle-men and defence agents have been banned ever since the 1980s Bofors scandal.
In 2002, however, the Central Vigilance Commission recommended to the Atal Bihari Vajpayee-led NDA government that middle-men and defence agents could be legalised. The rationale is that it would lend some transparency to negotiations.
However, the registration process that the NDA government recommended proved to be a major deterrent: middle-men and defence agents were (rightly) asked to provide bank details, tax returns going back several years, and highly regularised records of financial transactions.No agents ever ended up registering with the Indian government.
Since 2002, however, the importance and infamy of various defence middle-men and agents has grown in proportion; as defence deals have gotten bigger, defence agents have gotten more notorious.
There is nothing to suggest at the moment that Choudhrie and his family paid bribes to Indian officials. Where problems could arise is that legally speaking, as per the UPA government’s rules, if Russian defence firms or Rolls-Royce officially used Choudhrie as a defence agent, it would be illegal. In 2004, the defence ministry introduced an “integrity clause” that states for any deal over Rs. 100 crore the supplier needs to state that it has not engaged with any middle-man or agent to secure the contract.
For now, the UK’s Serious Fraud Office (SFO) needs to continue and conclude its investigation. The CBI and the ED, which have closed their files on Choudhrie but maintain him on a list of “undesirable middlemen” may look to re-open their investigation with the help of the SFO.