Pearls and Irritations

The arms trade is known for being one of the most corrupt of all legal international trades.

UK research shows that this corruption drives and distorts arms procurement decisions. Arms purchases that were not previously being considered can suddenly appear on the agenda.

Before delving into AUKUS, an egregious distortion in Australian defence procurement, I’ll briefly revisit the original French submarine contract.

The research shows that submarines, in particular, are a procurement area where a very high proportion of the small overall number of deals involve major corruption.

French multinational Naval Group had been wrangling with Malcolm Turnbull’s government for almost two years trying to get the formal contract signed.

In August 2018, Scott Morrison became PM.

Soon after, Naval Group hired David Gazard well-connected lobbyist, former Liberal candidate, and close friend of Scott Morrison, to help them get the deal over the line.

Within months, the Morrison government had signed the contract.

In early 2019, the ABC reported, ‘Naval Group confirmed the arrangement but did not disclose how much Mr Gazard’s company was being paid for its lobbying services’.

Mr Gazard’s company, DPG Advisory Solutions, declined to comment to the ABC about its role. I sent similar questions to Mr Gazard this week and had received no response by deadline.

At the time Australia put Naval Group on the shortlist, the company was under investigation for corruption in three other arms deals: two for submarines (Pakistan and Malaysia) and one for frigates (Taiwan). The Abbott government would have known this.

These were not minor corruption cases: all involved murder.

French authorities commenced another corruption investigation into Naval Group (submarines; Brazil) in late 2016, after Australia had awarded Naval Group the deal, but before we signed the contract.

How did the Abbott, Turnbull and Morrison governments shortlist, select, and then sign a contract with a company being investigated in four separate corruption cases?

Such is the MO of Australia’s Defence Department.

BAE Systems Australia is Defence’s largest contractor and has been for six of the past eight years.

BAE Systems is set to be a significant beneficiary of AUKUS. It has already been handed a £3.95 billion (A$7.5 billion) contract for the detailed design phase of the AUKUS submarines.

BAE Systems provides perhaps the best-known example of systematic high-level arms industry corruption.

Britain’s series of arms deals with Saudi Arabia was, and remains, its biggest ever arms deal. It earned BAE Systems at least £43 billion in revenue between 1985 and 2007, with further deals still ongoing. The deal included £6 billion pounds in ‘commissions’ (bribes), paid to the Saudis.

In addition, during the 1990s and 2000s, in ‘a deliberate choice that came from the top’ BAE Systems maintained a shell company registered in the Cayman Islands called Red Diamond Trading. This vehicle channelled hundreds of millions of pounds of bribes around the globe to key decision makers in a succession of arms deals.

The Guardian’s BAE Files contain 15 years of reporting on this subject.

Now let’s consider Australia’s largest ever surface warship acquisition, the Hunter class frigates, designed and built by BAE Systems.

Our national audit office was scathing of this procurement process. Last May it noted numerous serious governance failures, including key accountability documents going missing. The primary legislative requirement of providing taxpayers with value for money had been ignored.

After the release of the audit office report, I did some more digging and uncovered further serious conflicts of interest.

Defence had appointed former senior BAE personnel and advisers into important roles overseeing the evaluation of frigate tenders, without making those appointments public.

Defence also hired one of those former senior BAE managers to negotiate the frigate deal with BAE on behalf of Defence.

More detail about this extraordinary story is in my Substack archive.

It has also been revealed that BAE Systems was given the Hunter class frigate contract despite ‘long-running concerns’ inside Defence about BAE’s alleged inflation of invoices by tens of millions of dollars on the earlier Adelaide class of frigates.

Detailed allegations of fraud in the Adelaide-class contracts, including by Thales Australia, were published in three separate articles by the Weekend Australian in May 2019.

A Defence internal audit had reportedly found that BAE’s contract was ‘riddled with cost overruns, with the British company consistently invoicing questionable charges’.

Defence launched a second investigation.

18 months later, I asked Defence about the outcome of its second investigation. This was their response:

“An independent internal review of this matter found no evidence of inappropriate excess charges by BAE and Thales. The investigation did find some minor administrative issues which have been subsequently addressed through additional training. This training is now part of the normal cycle and is routinely refreshed.”

The “independent” review was conducted in secret by an existing defence contractor. His report was not made public.

Defence said “no evidence” was found of inappropriate excess charges. Yet the allegations were apparently so serious they were referred to Defence’s assistant secretary of fraud control who then referred several matters to the Independent Assurance Business Analysis and Reform Branch of Defence.

Recently, I have been collaborating with UK colleagues trying to uncover more about the Adelaide-class contracts. Freedom of Information requests have been lodged. Defence has blocked them, refusing to release a single page.

An appeal was submitted, Defence blocked that too. We have now appealed to the Information Commissioner.

If this was merely “a minor administrative issue” that has been resolved by “additional training”, why the aggressive blocking of any release of information through FoI?

I will finish by outlining a mini case study of undue influence and the revolving door – that of former CEO of BAE Systems Australia, Jim McDowell. (As I previously reported here.)

I am not implying any illegality on the part of Mr McDowell. I am simply laying out an array of his government appointments – not all of them – to highlight the extensive influence that just one person can have.

Jim McDowell had a 17-year career with BAE Systems including a decade as its chief executive in Australia, then two years running its lucrative Saudi Arabian business. He resigned from BAE in Saudi Arabia in December 2013.

In 2014, McDowell was appointed by the Coalition to a four-person panel undertaking the First Principles Review of Defence. This Review recommended sweeping reforms to the Defence Department, including its procurement processes, which have largely benefited major arms companies.

In 2015, the Coalition appointed McDowell to a 4-person expert advisory panel overseeing the tender process for the original submarine contract. When he announced McDowell as being part of this panel, Defence Minister Kevin Andrews didn’t mention McDowell’s long history with BAE Systems, which had ended only 18 months earlier. It was highly relevant, as BAE designs and manufactures Britain’s submarines.

In late 2016, then-defence industry minister Christopher Pyne hired McDowell as his adviser to develop the Naval Shipbuilding Plan. The appointment was not announced publicly. At that time, McDowell was also on the board of Australian shipbuilder Austal.

Under the Shipbuilding Plan, Austal subsequently won a contract to build six more Cape-class patrol boats while BAE Systems won the biggest prize, the Hunter-class frigate contract.

After the frigate deal was announced, South Australian premier Steve Marshall hired McDowell to head his Department of Premier and Cabinet. SA was the state that gained most from the shipbuilding plan.

In 2020, McDowell left the South Australian public service to become CEO of Nova Systems, a key defence contractor.

Last year, McDowell moved back through the revolving door into a senior role with the Defence Department. He is now Deputy Secretary for Naval Shipbuilding and Sustainment, reporting directly to defence secretary Greg Moriarty.

When appointed, McDowell said his new role was an opportunity he couldn’t turn down because it ‘provides the ability for me to shape the future of Australia’s shipbuilding and sustainment’.

In my view, McDowell’s long list of sensitive senior appointments should not have been possible. He cannot be the only person in the country qualified to undertake each of these roles.

This was a brief discussion of some aspects of the undue influence of the arms industry in Australia. I raise these issues in this AUKUS context because there has been almost no commentary about the likely influence of the arms industry in the AUKUS deal.

 

Edited text of a speech delivered to the IPAN AUKUS forum, March 12, 2024.