Habakkuk on BAE, the Saudis and the Slush Fund

I think Harper is absolutely right in suggesting that, important though the corruption story may be, the political element -- centering around the 'slush fund' -- is the really significant element in this story. I am curious about, and slightly surprised by, his calling this a 'MI6 slush fund'. From what little I know of the story -- and I have not followed it closely -- it seems quite likely that we are dealing with linkages involving elements in Saudi Arabia, Britain, and the United States. Looking back at the coverage of the 'Welch Club' and related matters on this blog and elsewhere from a year back, I recalled a comment quoted in Seymour Hersh's 'Redirection' piece, from a 'Pentagon consultant'. There were, the 'Pentagon consultant' remarked: 'many, many pots of black money, scattered in many places and used all over the world on a variety of missions'. Given the involvement of Bandar both in Iran-Contra and recent hi-jinks, as well as Al-Yamamah, there certainly seem grounds for suspecting that one of the functions of the contract, from the outset, may have been to create such 'pots of black money'. An interesting discussion of the 'slush fund', in an article in the Financial Times last July by Stephen Fidler hardly dispels these suspicions. (See http://search.ft.com/ftArticle?sortBy=gadatearticle&queryText=yamamah+fidler&y=7&aje=true&x=15&id=070702000587&ct=0.)

According to Fidler, Al-Yamamah was 'used, with the help of the British government, as a secret tool of Saudi foreign policy.' The arrangement, he suggested, 'at least initially, involved a special account controlled by the Saudis at the Bank of England' -- which received the funds from the sale of Saudi oil. He went on to say that 'some or all of the payments from the Bank of England account were routed through the UK's Defence Export Services Organisation, part of the Ministry of Defence.' This certainly raises the suspicion that the arrangement was from the start a kind of joint Saudi-British venture to provide resources for operations -- such as support for the Mujahideen in Afghanistan -- where resistance from legislative bodies and within bureaucracies got in the way of what leading policymakers wanted to do. It seems to however inherently unlikely that Mrs Thatcher -- who has always been very strongly Atlanticist -- would have gone behind the back of leading figures in the Reagan Administration in becoming involved in this kind of activity. It seems to me however eminently possible she was acting in tandem with the efforts of such figures to circumvent Congress. The dating is perhaps also worth noting: the letter from King Fahd stating his intent to buy 48 Tornados and 30 Hawk trainers was sent in August 1985, just as President Reagan was authorising the sale of arms to Iran. The suggestion by Fidler that 'at least initially' the arrangement involved this special account controlled by the Saudis seems to imply that arrangements may have changed subsequently. But I would somewhat surprised if it were simply controlled out of MI6 -- and even if it were, I would tend to suspect that those involved in that organisation were not acting simply on their own behalf, but as part of transnational networks. Another matter which continues to puzzle me is just how large the 'pots of black money' involved in Al-Yamamah have been. Obviously, the fact that monies have been invested with hedge funds -- at a time of historically very investment returns -- means that the total amounts may indeed be very much greater than the amounts the Saudis put in. However, if one could be reasonably clear about how much was put in, it might be possible at least to get very rough figures for the totals available for under-the-counter operations, using data on investment returns. According to Fidler, the volume of oil supplied varied, while cash may have been both put in to and taken out of the account -- which would seem to make computation of the net amount the Saudis put in difficult. 'The first oil lifting under the contract [Fidler writes] was on January 31 1986 of 1.8m to 1.9m barrels. The Saudis agreed to deliver 300,000 barrels per day [plus or minus 10 per cent] for the first three years of the contract. The amount of oil delivered varied with fluctuating oil prices up to a reported maximum of 600,000 bpd in 1993, when a new and expanded contract called Al-Yamamah 2 came into force, and fell to 400,000 in 1998 after the last Tornado was delivered. At times, the kingdom replenished the account with cash - and at other times there was a surplus that was available for distribution.' Even leaving aside investment returns from hedge funds, it is I think reasonably safe to assume that the difference between what the Saudis paid into Al-Yamamah and what was paid out to BAE is a great deal more than can be accounted for by bribes to Bandar and others. But I would be interested to know more about the basis on which the 'estimated (in current dollars) $160 billion in cash' figure was calculated. But whatever the precise figures, the whole affair really looks like a can of worms, and I do devoutly hope that that Harper is right in saying 'the action is just beginning.' The whole things looks like a very important sub-plot in the general story of the subversion of constitutional government, on both sides of the Atlantic, by individuals and groups with an unhealthy fascination with covert operations and a contempt for the constraints on their activities created by democratic systems.

David Habakkuk

Comments

[harper]

In reply to David H: I certainly agree that there is a US element in this transnational slush fund. For certain, the very nature of operations like the Afghan Mujahideen was a joint Western program, in which the Saudis, the Americans (Charlie Wilson's War) and the Brits, along with the French and Israelis, Egyptian, and others, all participated. I believe that what is unique about the Al Yamamah fund is the fact that in Britain, there is no wall of separation between government and private operations. Funds are co-mingled, and I am told that MI6 is even allowed to develop extra-governmental sources for revenue, to make up for shortfalls in government authorized funds. In the Simpson biography of Bandar, there is a whole section, dealing with Al Yamamah, that talks about these factors, that made the UK-Saudi cooperation so convenient--ie. both countries ran Al Yamamah as an off-budget program.

Re. the figure of $160 billion, I was working on very rough numbers, guestimating the number of barrels per day (probably a slight over-estimation), and then using the BP data base, which indicated yearly average spot market prices of Saudi crude, and the "lift costs" for the same period. These figures are available in both current dollar (the numbers I chose to use) and the value at the time of the sales. I did not have access to the year-to-year fluctuations in the number of barrels per day, paid by the Saudis.

I also had the opportunity to speak with several officials of the CIA and the Treasury Department, who provided some further insights. It was from CIA that I was told that there were MI6 people, working through the oil companies and through DESO and BAE, who were the hands-on managers of the funds, but I was cautioned that this was a very sensitive matter, and that there would be no likely way to ever publicly corroborate that. From Treasury, I was told that, while the initial $160 billion guestimate might be off, the "unknown" factor was how much of a turnover profit was made through the offshore investment of the funds, when they were not being used. That source insisted that, when the factor of the leveraging of the funds was taken into account, the size of the fund was vastly larger than my $100 billion net estimate, and had the character of a revolving fund that was being replenished.

So I fully agree with David on his major points: yes, clearly there is an American element in this, but it seems that the control is with some Brit-Saudi combination. And I do not believe that, short of some inside whistle-blower, we will be able to come up with any kind of precise estimate of the amount of money available, although it clearly goes well, well beyond the funds used in the bribery perse, of a handful of Saudi princes and MOD officials.

[JohnH]

I'm having a hard time understanding the Saudi piece of this. Saudi Arabia is totally opaque. They don't need any cover or secret accounts. They don't even provide an accounting of how much oil they ship. Why would they need to set up special accounts? Is this a question of rogue princes? Or is it the Saudi government simply providing money laundering services to rogue British/US elements who fear accountability?

I suspect this kind of behavior is quite widespread. I have often thought that a chunk of the US' $3 billion annual aid to Israel flows back to assure the continued flow of that aid.

[Andy]

I don't have the first clue about this BAE/Saudi scandal, but I remembered reading about it over on a blog by former foreign service officer John Burgess. Here's a link to BAE related posts there, some of which will hopefully add additional information and context for those more informed than me. I've had some correspondence with John in the past and I've written him again to see if he might have additional insight for the discussion here.

[William R. Cumming]

The fiction that defense contractors like BAE in the U.K. are independent of the governments for which they provide goods and services is just that--FICTION. All involved benefit from the fiction and of course accountability is destroyed. Does it matter--yes--because no longer government by the people and for the people.

[David Habakkuk]

JohnH,

As to what's in it for the Saudis: a very good question! As I am not a Middle East expert, my speculations are not worth very much. But it does strike me that, once you entangle people in structures of complicity which they cannot afford to see exposed, you are likely to acquire influence over their actions.

Harper,

"I believe that what is unique about the Al Yamamah fund is the fact that in Britain, there is no wall of separation between government and private operations. Funds are co-mingled, and I am told that MI6 is even allowed to develop extra-governmental sources for revenue, to make up for shortfalls in government authorized funds."

I have ordered Simpson's biography of Bandar, and will read what it says about the relations between government and private operations in Britain with great interest.

Is there any publicly available evidence about MI6 being 'allowed to develop extra-governmental sources of revenue' -- and the kind of sources they are allowed to develop?

I do really hope that this is not true. Any such privatization of the sources of revenue for intelligence would seem to me to entail very serious risks that intelligence agencies would simply cease to be able to perform their proper job -- particularly as it is not easy to see how one could have any reliable system of accountability in relation to funds from outside sources.

And I think it would also entail a non-negligible risk that intelligence services so funded would end up as a kind of cancer at the heart of the body politic.

What I any case suspect to be the case is that the growth of the private security sector does greatly increase the scope for private actors to influence the intelligence process.

Also relevant is the way that newspapers and broadcast organizations are often very easy for intelligence services to manipulate. And here, the failings of British intelligence are likely to be of concern to you Americans, as well as us Brits. As Colonel Sam Gardiner's posts on www.spinwatch.org make very clear, the ongoing campaigns to soften us all up for an attack on Iran is very much a joint Anglo-American operation.

On May 7, for example, Gardiner wrote:

'Over the past weekend, the Sunday Times of London carried an article quoting British officials and intelligence sources that the United States is drawing up plans for a"surgical strike" on a terrorist training camp inside Iran. According to the article such an attack would send a powerful message to the Iranians. Two days later, John Bolton, the former US Ambassador to the UN was quoted by the Telegraph as saying he supported such a strike to show "the Iranians we're not going to tolerate..." their training insurgents for fighting in Iraq.'

I do not know whether the people who suggest this are actually sanguine about the prospects of escalation, or deliberately trying to trigger such a process, in order to circumvent the obstacles to a resort to war -- in so doing displaying once again their contempt for constitutional government.

But if a war does eventuate, and turn into a disaster -- it might not, but it very well might -- then a lot of people may wish that the Lords Hutton and Butler had been less disposed to whitewash the failings of MI6. (They might even do so themselves!)

[harper]

David, I don't know if there is any published documentation re. private sources of funding for MI6. I will check with my source, and also probe for more details on how this works. Sorry I can't offer more at this time.

[John Howley]

More slush:

The Guardian, Monday May 26 2008
Prince Andrew's office yesterday confirmed that he had sold his home for £15m to buyers from Kazakhstan, but denied that the allegedly inflated price for the property was related to any business deals.

The new owner of Sunninghill Park in Ascot was reported by the Sunday Times to be Kazakh tycoon Kenes Rakishev, who the newspaper alleged had had business dealings with Prince Andrew.

The prince has been to Kazakhstan in his official role three times since 2003, and is patron of the British-Kazakh Society, founded in 2002 to promote relations between the two countries. The Kazakh president, Nursultan Nazarbayev, is the other patron of an organisation whose sponsors include Shell, the London Stock Exchange and BAE Systems.

http://www.guardian.co.uk/uk/2008/may/26/monarchy

[John Howley]

Third BAE man is targeted by US officials
By Sylvia Pfeifer, Defence Industries Correspondent
Last updated: June 4 2008 21:18
The former head of Britain’s arms export agency was issued with a subpoena two weeks ago by US authorities investigating allegations of corruption at BAE Systems, highlighting their determination to pursue a case that the UK has dropped.

Alan Garwood, now BAE’s business development director but who until last year was in charge of export sales at the Ministry of Defence, was served with a subpoena by Department of Justice officials at the end of May. Mr Garwood was changing aircraft at Miami airport.

The targeting of Mr Garwood is potentially significant. He worked on important campaigns, including last year’s deal to sell Eurofighter Typhoons to Saudi Arabia. He was seconded to the MoD from BAE in 2002.