Middle Men: Why are they needed for arms deals?: - What are they paid?

What does an arms middleman do?

He performs four basic tasks:

1) He bringstogether buyers and sellers of weapons and military equipment, rather as estate agents bring together buyers and sellers of property.

2) He arranges the supply of specialised services, for example training and maintenance for complex Western combat jets that are bought by nations without the expertise to keep these planes flying themselves.

3) He obtains weapons for nations, guerrilla groups, mercenaries or others not legally permitted to buy them from Western governments or defence manufacturers.

4) He acts as a financial 'cut- out' in the extraordinarily complex flow of funds generated by multi-billion-pound arms deals. That is to say he helps to conceal the payment of bribes.

How does that work?

Take Al Yamamah, the arms deal in which Britain contracted to sell Saudi Arabia Tornado jets and other military equipment worth more than pounds 20bn. One element of the deal was a plan to sell Black Hawk helicopters which would be made by the British company Westland under licence from the US firm United Technologies. This deal, in turn, was to involve a lesser deal, because United Technologies wanted to provide 'after-care' support.

According to a former employee who testified in a Washington court case, the company designated to handle the 'after- care' was a Saudi Arabian firm controlled by a Saudi businessman and two Saudi princes. This firm was brought in, not because it was good at 'after- care', but because of the silent partners. Payments to the company for 'after-care' services would look legitimate and in part they would be legitimate. But they would also serve as a conduit for the payment of bribes to the Saudi princes - bribes which, the former employee alleged, were promised to ensure that Saudi Arabia bought United Technologies helicopters in the first place.

How does a middleman supply guerrillas etc?

By obtaining false documents called end-user certificates. Western governments require arms manufacturers to obtain an export licence to sell overseas, and for this they must show an end-user certificate from the country to which the arms are being shipped. This system is not fail-safe because corrupt officials in many countries sell end-user certificates for personal profit.

For example, in the early 1980s an arm of the British defence company Plessey (an arm that no longer exists under its present ownership) earned large profits selling battlefield communications equipment to Colonel Gaddafi. Then in April 1984, Britain banned military sales to Libya.

At the time the arms dealer Barry Howson was working for a defence consulting company and he has said his firm was asked to find a false 'end-user' certificate so that the British company could claim it was selling to an approved buyer while continuing its exports to Libya.

Mr Howson's company first made enquiries about fake certificates in Ghana, but it ended up dealing with a friendly military officer in Syria. Mr Howson says he does not know how the deal came out, but he states unequivocally that his job was to get the equipment to Libya even though it was illegal.

Are middlemen always involved in arms deals?

No. For example, the US defence company Lockheed is currently bidding to sell a billion dollars' worth of C130J transport planes to the British Ministry of Defence. Although competition for this business is intense, Lockheed is dealing directly with the MoD and no middlemen are involved.

'As a rule,' says a US military official involved, 'middlemen are not used in defence sales between the US and Western Europe. They are used in other parts of the world.'

How much does an arms middleman earn?

Arms middlemen are paid in the same way as Hollywood producers: they earn 'points'. One point is 1 per cent of an arms deal's value. On small deals a middleman earns anywhere from 1 to 10 points. On large deals swarms of middlemen divide up honeypots that sometimes equal 25 per cent of the value of a deal.

Asked for his opinion of allegations that Mark Thatcher earned pounds 12m from a pounds 240m commission flow on Al Yamamah, one British arms dealer replied: 'Let's see. Twelve out of 240. Five points. Who knows if it's true? But the numbers sound logical.'

Why can't we find out more about all this?

Arms middlemen are secretive. A former marketing manager for British Aerospace reports that contracts covering sensitive arms deals are customarily locked in Swiss safe deposit boxes. Normally, there are two contracts. One is an 'outer' contract stipulating conditions under which parties to a sensitive arms deal can gain access to an 'inner' contract stating its terms.

A typical 'outer' contract says that any party to an arms deal may go into a Swiss safe deposit vault, examine the 'inner' contract, and take notes. But no party can remove the 'inner' contract from the Swiss safe deposit box unless all parties are present and agree to do so. So few 'smoking gun' documents are likely to reach the public domain.

Why are arms middlemen so secretive?

For two reasons. First, most professionals who go wrong at work face a maximum penalty of temporary unemployment. Arms middlemen who fail can face destitution, jail, or death. Gerald Bull, the arms middleman who also designed Saddam Hussein's Supergun, was shot six times outside his Brussels apartment.

Paul Grecian, an arms dealer (appealing against his conviction for illegally supplying munitions to Iraq in the 1980s) went from owning a manor house in the Scottish borders to living out of a suitcase in a rugby clubhouse.

The second reason is that this is not a business in which trust plays a part. Consider the Republican candidate for the US Senate in Virginia. Oliver North was a key player in the Iran-Contra scandal, in which Western hostages in Lebanon were ransomed by shipping weapons to Iran, and the profits were used to arm the Nicaraguan Contra rebels. To whom did Colonel North remain loyal? Not to the arms middlemen - Khashoggi, Ghorbanifar, Nimrodi - whose services he used. Not to his superiors in the White House, whose instructions he ignored. Not to Terry Waite, whose naivety he exploited. Not even to President Reagan, who recently distanced himself from Mr North.

Are commissions on arms deals illegal?

Not usually. Britain's Ministry of Defence and Trade Department have unofficial guidelines on the limits of commissions it is correct to pay on arms deals. The US has the Foreign Corrupt Practices Act, which does not outlaw commissions but imposes penalties on those paying them who fail to report what they are doing.

The issue for Mark Thatcher and Al Yamamah is one of Cabinet protocol. Guidelines for Cabinet ministers state that neither a minister nor his family should benefit financially by virtue of his office.

Is Mark Thatcher an arms middleman?

Mr Thatcher denies it. In response to the allegations about his role in Al Yamamah, Lady Thatcher's son said he had never 'sold a penknife'.

However, a Florida-based Armenian arms dealer, Sarkis Soghanalian, is on record as saying he was introduced to Mr Thatcher in the mid-1980s while negotiating to buy night-vision equipment for Iraq from the British company United Scientific Holdings. Mr Soghanalian said he interpreted this as a sign that the deal was 'blessed' by British authorities.

If Mr Thatcher was involved in the Al Yamamah arms deal, the odds are it was at least as oblique. Whether this would make him an arms middleman is a moot point. He may not have been quite in the middle, but this and other allegations suggest he was in the deal.

Are middlemen really necessary?

The world might be better off without them, but that's not going to happen. Middlemen are as eternal, and as useful, as estate agents. You are a third world defence minister, or a guerrilla leader, and your army needs guns. You do not approach sellers direct because you do not know the market. So you go to the expert, who is the middleman. Since you are also corrupt and you want to make money personally out of the deal, this suits you, for the middleman also understands these things. Buyer and seller are brought together and the deal is done to everyone's satisfaction. And if the middleman is clever, he might even manage to make a commission from both sides.

Leading article, page 22

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