Corruption row grounds helicopter deal

Italian defence group given a week to respond to accusations that it paid bribes to secure lucrative contract to supply military aircraft.

NEW DELHI // India's latest corruption scandal has revived the perennial bogey of its defence industry: the middleman who doles out kickbacks to swing lucrative equipment contracts.

The Italian defence group Finmeccanica SpA has been accused of paying 3.62 billion rupees (Dh248 million) in bribes and kickbacks to secure a 35.46-billion-rupee contract to supply 12 AgustaWestland helicopters.

Finmeccanica's chief executive and chairman, Giuseppe Orsi, was arrested on Tuesday over the bribery allegations and has resigned from his position. On Friday the Indian defence ministry sent a notice to AgustaWestland, a division of Finmeccanica, giving it seven days to show why the helicopter contract should not be cancelled.

In India, the man in the eye of the storm is SP Tyagi, who was chief of the Indian air force between 2004 and 2007.

Although Mr Tyagi has claimed that he met AgustaWestland's middleman only once, a report of inquiry by Italian authorities has stated that they met at least six times.

The report also alleged that three brothers - cousins of Mr Tyagi - were paid 7.2 million rupees in return for access to the air-force chief, to help change the parameters of helicopter tender such that they would benefit AgustaWestland.

The accusations against the Tyagis fit a long tradition in India: people in influential positions, often with army backgrounds, who are paid to sway military procurement decisions.

Defence middlemen can be legitimate businesspeople, said Bharat Verma, a former cavalry captain who now edits the Indian Defence Review.

"If you're buying air-to-air refuellers, then you can go directly to the manufacturer, and you don't need a middleman there," Mr Verma said. "But if you're hunting for spare parts for MiG-21 [aircraft], they aren't available so easily. So you need a middleman to help hunt them down."

It is only natural for such middlemen to take a fee for their services, he said. "But the problem comes when middlemen take or give hidden kickbacks."

So persistent has this problem been that a Congress-led government, soon after winning elections in 2004, introduced a stringent "integrity clause" into all defence contracts.

The clause explicitly prohibits bidders from offering, "directly or through intermediaries, any bribe, gift, consideration, reward, favour, any material or immaterial benefit or other advantage, commission, fees, brokerage or inducement to any official".

"Over the last 10 years, the defence procurement process has become more stable and more transparent, and it's getting better by the day," said Gurmeet Kanwal, a retired brigadier who is now the director of the Delhi-based Centre for Land Warfare Studies. "Even so, it's difficult to hazard a guess about whether the number of such middlemen has come down."

Last April, for the first time, the Indian government imposed penalties for violating the clause. Israel Military Industries, the Ramat HaSharon-based weapons manufacturer, was blacklisted for 10 years and fined 2.24 billion rupees after it was named in a corruption probe for allegedly offering bribes.

India's defence minister, AK Antony, has spoken out often against unauthorised middlemen during his six and a half years in the position. "We are very clear. As far as defence contracts go, we will not allow middlemen in deals," he said in 2008.

But India's defence budget is perhaps too lavish to deter middlemen completely. In the government's budget for 2012-13, a sum of 1.93 trillion rupees was earmarked for defence expenditure, a 17 per cent hike over the previous year's outlay.

"In India, defence deals are so huge, in monetary terms, that even a 1 per cent or 2 per cent commission is very lucrative," said Mr Kanwal.

The byzantine nature of India's defence-procurement framework, in part, makes foreign companies "feel like they need help, because the laws and processes are not always transparent", he added.

Perhaps the most infamous case involving defence middlemen is the Bofors scandal, named after the Swedish arms company.

In the late 1980s, an investigation by Swedish Radio alleged that Bofors went through an Italian businessman to pay kickbacks to top Indian politicians, implicating even the prime minister at the time, Rajiv Gandhi. The bribes were paid to help win a US$285 million (Dh1.05bn) contract to supply field howitzers.

Despite the banning of unlicensed agents and middlemen soon after Bofors, the shadow of that scandal has intruded into other defence deals ever since.

In 2001, for example, the magazine Tehelka revealed that kickbacks were paid in India's purchase of the Barak 1 missile system. India had contracted to buy from Israel seven Barak launch systems, at an estimated cost of $200m, and 200 missiles, at a cost of about $69m.

Last year, VK Singh, who was army chief at the time, alleged that he had been offered a bribe to expedite the armed forces' purchase of sub-standard trucks from the Czech firm Tatra.

Mr Kanwal noted that the most worrying aspect of such deals was that the Indian forces were not getting the equipment they needed or deserved.

"If somebody is being paid money [to scout out necessary equipment], I don't think it should matter too much to us," he said. "What we need to do is ensure that we get the best bang for the buck."