Bribes from Brazil

An Embraer ERJ-145 with the DRDO developed AEW&C radar at Aero India 2015 in Bangalore

In the murky world of arms deals which thrives on stealth and shady wire transfers, the document filed before a US court probably came as a blast of bright, blinding sunshine. In a 59-page deferred prosecution agreement in the US district court in Florida on October 24, Brazilian aircraft manufacturer Embraer confessed it was guilty of paying bribes to bag aircraft contracts across the world.

The agreement, a copy of which is with India Today, painstakingly details how Embraer paid $5.76 million in 2009 to an Indian arms agent identified in the document only as ‘Agent D’. The bribes were to swing a $200 million deal for the sale of three Embraer ERJ-145 jets. These twin-engined aircraft were to be customised for India to fit an indigenous Airborne Early Warning and Control (AEW&C) radar.

The path to the doorstep of the US district court in Florida was a long one. It began in 2010 when US authorities suspected irregularities in the sale of aircraft by Embraer to the Dominican Republic. The allegations gathered steam in 2013 when the US Securities and Exchange Commission (SEC) first detailed kickbacks paid by the Sao Paulo-based aircraft manufacturer to bag contracts in several countries including India. The October 24 agreement essentially means that Embraer is free to carry on its business after paying the hefty $205 million in fines to US authorities. An October 24 statement released by the Sao Paulo-based aircraft conglomerate, expressed ‘deep regrets’ for its conduct, acknowledged responsibility for the conduct of its employees and agents according to the facts ascertained in the investigation.

The fraud section of the US department of justice moved against the Brazilian airplane maker in 2013. US laws like the Foreign Corrupt Practices Act, 1977, which prohibits bribery of foreign nationals apply to US-registered companies like Embraer which trade shares on the New York Stock Exchange. The ripples of the global bribery scandal, from which Embraer made an $83 million profit, have already begun to be felt in India. The CBI ( India Central Bureau of Investigation) registered a preliminary inquiry in September this year when a Brazilian newspaper first reported the bribery investigations.

The CBI now believes Agent D is Delhi-based defence consultant Vipin Khanna, 87. On October 18, the agency registered a case against the octogenarian defence agent for receiving bribes in the aircraft purchase. This means the Union ministry of defence could place further dealings with the Brazilian jet maker on hold unless the ministry notifies a new debarment policy that lays the ground rules for dealing with bribe-giving defence firms (see box: Blacklist Policy Paralysis). “The CBI investigation will proceed according to Indian laws on corruption, kickbacks etc. subject to appropriate evidence,” a defence ministry spokesperson said.

For over two years now, the NDA government has toyed with a debarment policy which would punish bribe-giving defence companies without hurting defence preparedness. The effects of blacklists on Bofors and HDW after the bribery scandal of the mid-1980s have lethally impacted India’s defence preparedness for nearly three decades. Over a dozen defence suppliers have been blacklisted in the past decade.

India Finance minister Arun Jaitley, who held the defence portfolio earlier, summed it up in August 2014. Blacklisting, he said, “upholds consideration of probity but narrows our buying options…which can affect our security preparedness”. In 2014, the MoD initiated a nuanced suspension and debarment policy which, rather than an outright ban, looked at a graded response to allegations (see box: Three-Stage Debarment Policy). A blacklist was the last resort, only after allegations of bribery are established by the CBI.

Even so, the MoD and Service HQ retained the right to deal with the tainted firm in the name of national security. A draft of the policy has been pending with defence minister Manohar Parrikar for close to a year now. The MoD is believed to have scrapped a proposal to legalise defence agents in arms sales. The delay in approving the debarment policy has resulted in anxiety within the forces. The policy was supposed to be released with the Defence Procurement Policy (DPP) in March this year, but held back. In fact, the DPP mentions it at least a dozen times. Blacklists continue to impact the military machine that already imports nearly 70 per cent of its defence requirements. They shrink an already limited space of equipment suppliers.

The navy’s new Scorpene class submarines, for instance, do not have torpedoes because the torpedo maker belongs to the Leonardo-Finmeccanica firm, one of whose subsidiaries is accused in the 2010 VVIP helicopter purchase scandal. Major democratic military powers like the US have elaborate suspension and debarment procedures, which balance considerations of probity and integrity with national security. In the deferred prosecution agreement, authorities included a simple formula for assessing Embraer’s guilt. The calculations clinically weigh various factors- the complicity of senior officials and the company’s contrition-before arriving at the figure of 205 million dollars. “India has not been able to strike such a balance due to inappropriate policies,” says Vivek Rae, former DG (acquisitions) in the defence ministry.

“The Indian political and bureaucratic establishment likes to occupy the moral high ground at the slightest whiff of corruption, overlooking the fact it might be compromising national security. There are various options for penalising rogue companies. Blacklisting need not be the default option.” Defence ministry sources say a Defence Acquisition Committee meeting, slated for November 7, will take a final call on the debarment policy. But as with several recent meetings, it remains to be seen if the policy actually gets approved.

 The sleaze trail

Embraer first touched down in India in 2004 when the Indian Air Force’s Palam-based communications squadron bought three ECJ 135 business jets (a fourth jet was purchased by the home ministry for the Border Security Force). The aircraft, meant for use by the defence minister and the service chiefs, quickly set new standards in comfort. One UPA-era defence minister, who moved out to another ministry, insisted on still being able to use the business jet.

By 2015, the Brazilian firm was the world’s third largest airplane maker after Boeing and Airbus. The company delivered 215 jets last year, with a year-on-year growth of 6.3 per cent and an order backlog of $22.5 billion. A vein of corruption however ran through some of the deals for military aircraft as the documents filed before the US court show.

Sometime in January 2005, soon after its maiden foray into India, Embraer signed an agency agreement with a shell company domiciled in the UK and affiliated with Agent D.

Under the agency agreement, Embraer agreed to pay the shell company 9 per cent of the value of any defence contract. According to the deferred prosecution agreement, “Embraer believed that Agent D could help ensure that any contract would be awarded on single-source rather than competitive basis”.

Embraer, of course, knew the agreement with the agent was illegal under Indian law and thus took steps to conceal its existence. The sole fully-executed version of the agreement was placed in a safe deposit box in London. It could be opened only when both an Embraer employee and Agent D or his associate were present. This also explains the even greater lengths the firm was to go to mask the eventual bribes to Agent D. The money trail passed through Switzerland and was routed through a shell company in Singapore which paid the Indian agents.

India’s defence ministry bans middlemen and the payment of commissions in defence deals. Companies have to sign a pre-tender integrity pact where they expressly state they have not paid money to manipulate the contract.

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