MP who saw no evil

INSIDE STORY How did Jonathan Aitken get involved in the arms business? And should we believe him or his chairman? By David Hellier

WHEN Jonathan Aitken, Tory politician and millionaire, joined the board of the arms company BMARC in September 1988, it must have seemed as easy a way as any to make £10,000 a year.

His duties involved little more than attending a monthly board meeting at the firm's headquarters in Grantham, Lincolnshire, (which he could leave by lunchtime) and, if he is to be believed, they did not require him to be aware of the ultimate destination of BMARC's products.

But Mr Aitken has paid a high price for his 22 months as a non-executive director. Now a cabinet minister, he spent much of last week fighting allegations that during his spell on the board, BMARC exported naval guns to Iran in defiance of a British government ban and that he must have known about it.

Ironically, the man who introduced him to BMARC in 1988, Gerald James, has been instrumental in causing his discomfiture. Mr James waschairman and insists that Mr Aitken would have had to have been "deaf and blind" not to have known about the Iran sales.

The story of Gerald James, of BMARC, and of its parent company Astra is in many ways a typical tale of 1980s business excess. Like other such tales - Polly Peck and Guinness, for example - it has left a residue of litigation, bitterness and scandal, a scandal which has now ensnared the Chief Secretary to the Treasury.

Unlike Polly Peck and Guinness, the Astra story is also a cautionary tale of the perils and pitfalls of the international arms trade, a dark and sinister world in which dealers and shareholders are at the mercy of governments and their security services.

IT ALL began in the early 1980s, when Mr James decided to move into the arms trade. A former member of the right-wing Monday Club and a habitu of the Naval and Military Club in Mayfair, he had previously been a merchant banker (with Barings).

He joined forces with Christopher Gumbley, a portly former army man with an enthusiastic sales technique and a knowledge of ammunition and ordnance. In 1981, with other entrepreneurs, they bought a small fireworks company, Astra Holdings, as the vehicle for their ambitions.

Those ambitions were grandiose. Mr James and Mr Gumbley planned nothing less than to create a company capable of challenging the might of British Aerospace, the newly privatised giant of the UK defence world. In pursuing that aim, they expected help and encouragement from Margaret Thatcher's government, which had publicly declared its intention of introducing more competition into the business of allocating official contracts.

By the late 1980s this unlikely pair appeared to be well on the way to achieving their dream.

As Sir Richard Scott discovered during the hearings of his "arms to Iraq" inquiry, these were heady days in the arms business, as the long, slow- moving and horrendously bloody war between Iran and Iraq created a huge demand for weaponry from all possible sources.

And they were also exciting times in the City where, through a series of acquisitions, Astra grew quickly to become a darling of the stock market.

It was one of a clutch of companies of the period, along with Asil Nadir's Polly Peck International, Blue Arrow, Brent Walker and Guinness, which were all growing with breathtaking speed through a relentless series of takeovers.

They appeared to have found a virtuous circle of growth: each takeover brought in an instant flow of profits which boosted the share price. This in turn enabled the firm to issue new shares to finance yet another takeover and start the process again.

All this was made possible by the loose accounting regulations of the time, which tended to favour growth by acquisition rather than internal expansion.

In time, with Astra as with the others, the balloon burst. After the Astra collapse in 1992, a 550-page report from the Department of Trade and Industry called into question the accounting methods used during the company's growth.

But that lay in the future. Through the 1980s Astra grew by purchases in Britain and the US, but it was in May 1988 that its bosses thought they had pulled off their biggest coup by buying BMARC - the British Manufacture And Research Company - for £55m.

BMARC had previously been owned by Oerlikon Buhle, a Swiss conglomerate, and among its assets was a licence from Oerlikon to produce a 20mm naval cannon. But to Astra the firm's real attraction was that it offered access to the £500m-a-year ammunition market, a key area in which the company hoped to compete head-on with British Aerospace. It was a turning-point for Astra, but not in the way Mr James and Mr Gumbley had hoped. They were outwitted.

In the time it took them to complete the acquisition of BMARC, British Aerospace, which had recently acquired Royal Ordnance, the munitions maker, from the government, was able to clinch a deal with the Ministry of Defence.

This guaranteed BAe 80 per cent of the British munitions market for the next five years, scuppering Astra's chances of making any real inroads into it.

Astra's directors could not believe what had happened; they felt they had been cheated by a government which promised competition but delivered cosy behind-the-scenes deals. Mr Gumbley complained in Whitehall and Westminster, putting his case to politicians such as Alan Clark, then at the Ministry of Defence, and Kenneth Warren, then chairman of the select committee on trade and industry. He employed a lobbying company, Decision Makers, to help.

Mr Gumbley ruffled feathers by alleging that Astra had been double-crossed over the Government's agreement. Even his colleagues were dismayed. One former Astra director said: "He was behaving like a loose cannon and probably caused us in the end to have quite a few enemies in Whitehall."

Whatever the rights and wrongs of the spat with BAe, BMARC's failure to get a foothold in the British munitions market was a serious commercial setback. It made the acquisition look expensive to traders in the City and Astra's share price, after a steady rise, soon began to slide.

IT WAS at this stage that Gerald James invited Jonathan Aitken to join the board as a non-executive director.

A member of the Beaverbrook family, once owners of the Daily Express, Mr Aitken had made a fortune in his own right. During a spell in the Middle East as representative of Slater Walker, the property company, he had made some very valuable connections, including some in the Saudi royal family. In addition, in the early 1980s he set up a merchant bank, Aitken Hume, with his cousin Timothy.

Astra board members had been in contact with him from an early stage. The attraction for them was obvious: not only was Mr Aitken a prominent businessman with influence in the Middle East and an interest in the arms trade, he was also an MP in the governing party. Moreover, Astra's modest headquarters in Sandwich, Kent, happened to be in his parliamentary constituency, Thanet South.

When Mr Aitken joined BMARC in September 1988, he was not the important political figure he is today. Then aged 46, he had been an MP for more than 14 years but he was still a backbencher, apparently going nowhere in government (some say because he had jilted Margaret Thatcher's daughter, Carol). His business career seemed a good deal more lively than his political one and, although he was to have no executive role, BMARC and Astra were glad to have him.

AFTER its setback with BMARC, Astra moved desperately to recapture its City glow by making another acquisition; Poudrires Runies de Belgique, a subsidiary of Belgium's largest industrial company, Socit Gnrale de Belgique.

Astra raised £38m from its shareholders to buy PRB for £20m. The remaining £18m went to shore up Astra's by then creaky finances.

If BMARC was a mistake, PRB turned out to be a calamity as far as Astra's directors and shareholders were concerned. Shares for the transaction were issued at 120p each; within a few months they had become practically worthless.

Shortly after agreeing the price for the company, Astra discovered internal documents showing that PRB would not reach the £100m turnover tar- get which it had promised in earlier negotiations.

At around the same time, Astra's main board directors became aware of a contract for propellant for Jordan, placed with PRB by one Gerald Bull. Bull was a well-known Canadian ballistics expert, and the propellant, it was soon clear, was destined for Iraq (where Bull was busy developing his "Supergun" for use by Saddam Hussein).

Mr Gumbley had already been tipped off by a senior Ministry of Defence official that if he found anything suspicious at PRB he should report it immediately to the security services.

The suspicious contract was duly reported by Mr Gumbley, Mr James and another director, Stephan Kock, in September 1989 (although later the Government said that it knew nothing about the Supergun project and British companies' involvement in it until April 1990, when Customs officers seized some steel pipes at Teesport). Despite its directors' suspicions, Astra was given the go-ahead by the security services to proceed with the first phase of the PRB contract. This curious decision has echoes of the Matrix Churchill case, when it emerged that Britain's security services were prepared to allow sales of military equipment to Iraq to go ahead in certain circumstances because the deals allowed them to acquire important information concerning the Iraqi procurement network.

But Astra's misfortunes continued. A mysterious explosion at a PRB factory in Kaulille, Belgium, disrupted production of the propellant for Iraq.

PRB was now sliding rapidly downhill, and Mr James blamed its previous owners for the difficulties. But in the spring of 1990, while he was pressing a claim against them, he was suddenly ousted from Astra, along with Mr Gumbley and other directors, in a boardroom coup. The coup was led by Stephan Kock, a former Rhodesian SAS officer who had turned consultant for Midland Bank's secretive defence sales department.

Although the new board attempted to halt the slide, two years later Astra went into receivership. The reckoning is not yet complete but the receivers, Cork Gully, estimate that the company's banks, which were owed around £50m, will get around half their money back while Astra's shareholders have lost everything.

Jonathan Aitken was, it seems clear, little more than a spectator in all this, but the question now is: how much did he see?

He was a director on BMARC from September 1988 to June 1990, when he resigned. We now know that from 1986 to 1989, BMARC was engaged in a business activity that was in breach of government rules. Under a contract code- named Project Lisi, it was supplying Oerlikon naval guns to a company in Singapore in the knowledge that they were subsequently being delivered to Iran. This was, moreover, a substantial part of the firm's business: in one month of which we have knowledge, it accounted for 10 per cent of the firm's turnover. A succes- sor contract, Lisi II, was under consideration.

The Independent showed last week that in late 1988 and early 1989 the Lisi contract was referred to frequently in board documents, and produced evidence indicating that it was discussed at two meetings which Mr Aitken attended.

Mr Aitken, responding to these charges, declared at first that he neither saw nor heard any reference to Lisi, adding that he had left one of the board meetings early.

Later he said that "in no board paper of that company was I ever given the slightest indication or information that the company's wholly legitimate contract with Singapore might subsequently result in components being shipped to Iran". In other words, he knew of a contract with Singapore, but not that naval guns were ending up in Iran. He said that he "certainly would not have countenanced" the sale of weaponry to Iran via Singapore.

Mr James is equally adamant that the true destination of the guns, if it was not explicit in company documents, was an open secret in the company and that Mr Aitken must have known of it. Both men have called in evidence other board members to support their positions. Mr Aitken spent considerable time last week talking to former directors of BMARC.

As the political heat mounted, the Prime Minister expressed his support for the Chief Secretary, while the Labour front bench demanded an independent inquiry into the allegations.

WHERE does this leave us? As he did over the accusations last year relating to his stay in the Paris Ritz, Mr Aitken has stood his ground and provided lengthy rebuttals of the charges being made against him.

He has also attempted to discredit Mr James, describing him in the House of Commons as being "bitter" and a "failed chairman".

There is no doubt that Mr James's experience at Astra has left him a bitter and angry man who has a grudge against the Government.

He resents suggestions that Astra was ruined by financial incompetence on his part. He has long maintained instead that ministers were playing a double game in the 1980s, encouraging companies such as his and Matrix Churchill to fight for overseas business that was politically sensitive and then refusing to support them, either financially or in the courts, when things began to go wrong.

Mr James has also alleged that ministers knew much more about the trade to Iran and Iraq during the 1980s than they have ever told Parliament.

Mr Aitken's attack on him last week was not the first time that the Government or its allies have hit back. During the Commons select committee inquiry into the Supergun affair, a number of Conservative members gave Mr James a difficult ride, accusing him among other things of being a "fantasist".

At the end of the inquiry, however, the committee accepted that in all matters about which he had direct knowledge, Mr James's testimony had been proven absolutely correct.

The Chief Secretary to the Treasury, who came so late to cabinet office, has had a turbulent time of it. He may ride out this storm, but Gerald James is unlikely to leave him in peace.

Alan Watkins, page 25

A brief history of embargoes

OFFICIALLY, during the period of the Iran-Iraq war, Britain joined a United Nations embargo and banned the sale of weapons to either side. Government guidelines issued in 1984 said: "We should not in future approve orders for any defence equipment which in our view would significantly enhance the capability of either side to prolong or exacerbate the conflict."

That was changed in 1988 to: "We should not approve orders in future for any defence equipment which in our view would be of direct and significant assistance to either country in the conduct of offensive operations."

The guidelines were backed by legislation. Under the Export Control Act it is illegal to ship weapons abroad without first obtaining an export licence from the Department of Trade and Industry.

Instead of stopping exports to either Iran or Iraq, however, the embargo appears to have encouraged manufacturers all over the world to find covert ways of getting their weapons to the two sides.

Many British companies managed to circumvent the rules, either by sending weapons via third countries such as Jordan or Singapore - as was the case with BMARC's naval guns contract - or by filling in application forms for export licences rather creatively, as was done in the case of Matrix Churchill.

Matrix Churchill directors and other members of the Machine Tools Association were encouraged by Alan Clark, then a minister at the Department of Trade and Industry, to emphasise the peaceful nature of their machine-tool exports although it was known that they were intended to be used for military purposes. As some of the evidence to the Scott inquiry (due to report in June) has shown, the British government adopted a rather schizophrenic attitude to the sale of weapons to barred countries. As Keith Bailey, the chairman of BSA Tools, wrote in an article in the Independent last week, "in the Eighties, the rules governing the export of arms were much more loosely applied and interpreted". (A charge against Mr Bailey of illegally shipping lathes to Iran was dropped in November 1992.)