MoD chiefs allowed 10% ‘agency fees’ in huge Saudi military-communications deal
By Frederika Whitehead | 26 June 2012
A secret memo written 36 years ago shows that top officials at the Ministry of Defence (MoD) approved payments of “agency fees” to help clinch a government-to-government contract to overhaul the Saudi national guard’s communications systems.
It also reveals that the MoD regarded such payments as unnecessary when buying from the defence industry for UK armed forces, raising questions over the purpose of such “agency fees”.
The memo even shows that a Cayman-registered company at the centre of bribery allegations today was lined up back in 1976 to receive “agency fees”.
Exaro’s latest disclosures on the Saudi communications contract has prompted a senior Liberal Democrat MP, Malcolm Bruce, to join the shadow attorney general, Emily Thornberry, in calling on ministers to allow the Serious Fraud Office (SFO) to press ahead with a full investigation into the deal.
The key memo was written during talks in 1976 about the deal, known as the Sangcom project, between Saudi Arabia and Jim Callaghan’s Labour government.
Sir Lester Suffield, the most senior civil servant at the MoD unit responsible at the time for promoting UK defence sales overseas, told Cooper that Sangcom – worth £150 million then – provided for “agency fees” of 15 per cent. The project later expanded hugely.
Suffield, then head of the MoD’s Defence Sales Organisation, wrote that “the fees being demanded” are not “exceptionally large in terms of the per-centages commonly charged in Saudi Arabia.”
“In absolute terms, the sums involved are very large,” he said.
“I have discarded as unthinkable the possible option of informing the Saudis that we have decided not to proceed.”
The proposed fees should be treated as “legitimate charges to the projects” or curtailed, but without “reducing them to a level that would permit the French, or others, easily to outbid us.”
Suffield, who died in 1999, recommended approving “agency fees” of 10 per cent and allowing the project’s prime contractor to increase its profit margin to accommodate other charges, to a level that would not be allowed for sales to the UK government.
He wrote: “I would also recommend that the profit margins allowed on projects of this nature be significantly more generous than on contracts for the supply of equipment or services to HMG.”
“I do not believe that there is anything in the argument that an increase in the profit margin on overseas projects would lead contractors to expect similar treatment on a British contract. Were they to do so, their claims could be very easily withstood.”
The documents were accidentally declassified and released in 2006 to the National Archives, where they were discovered by Nicholas Gilby, a researcher for the Campaign Against Arms Trade.
At the time, the media focussed on the MoD’s general acceptance of “agency fees” in Saudi defence deals, but the significance of the Sangcom references has only become clear since an Exaro investigation revealed details of transfers totalling just over £14.5 million linked to the deal and paid to two mysterious companies in the Cayman Islands between 2007 and 2010.
The declassified memos prompted the late Lord Gilmour, Conservative defence secretary in 1974, to say: “You either got the business and bribed, or you didn’t bribe and didn’t get the business.”
Malcolm Bruce, a Liberal Democrat MP on the arms export controls committee, told Exaro: “It would be extremely damaging if the government intervened to stop any further investigation in the light of this new information. The SFO must be free to pursue its investigation and take whatever further action is necessary, including prosecution if there is any serious prospect of a conviction.”
An MoD spokesman said: “Certain commercial arrangements relating to the Sangcom programme are commercial-in-confidence and, as such, it is not appropriate to expand on these matters.”
Its prime contractor denies any wrongdoing.