Calls for EU to Halt Corrupt Defense Deals

MEPs and defence experts are calling on the European Commission to go after market-distorting and allegedly corrupt side deals attached to big weapons purchases between member states, such as the ones greasing Germany's submarine sales to Portugal and Greece.

As EU officials are packing their holiday suitcases in Brussels, prosecutors in Germany, Portugal and Greece are tracing the complex trails of alleged bribes and side-contracts associated with the German submarines that Portugal and Greece signed up for at a price of more than €1 billion.

The hypocrisy of allowing Greek and Portuguese governments to allocate huge parts of their budgets to questionable defence purchases while they are being pressed for austerity measures to trim their deficits has already made headlines such as "The Submarine Deals That Helped Sink Greece" in the Wall Street Journal earlier this month.

"What's striking about Greece and Portugal is the inappropriateness of these purchases," Nick Witney, a defence expert with the European Council on Foreign Relations, a London-based think tank, told EUobserver. "It makes no sense at all to urge austerity and at the same time encourage them to buy weapons. But where there's a nexus of security, secrecy and lack of competition, there is always an open field for corruption," he noted.

Munich-based investigators in March opened a case against the German engineering group Ferrostaal, which is suspected of paying bribes to secure defence contracts in Portugal and Greece and of organizing bribery payments on behalf of other firms for a fee.

The investigation has meanwhile spread to Portugal and Greece, and touches on former party colleagues of European Commission president Jose Manuel Barroso, who was prime minister at the time the contract was signed. Mr Barroso has denied any involvement in the alleged bribery scheme and says he had nothing to do with the negotiation of the contract, which was the responsibility of the defence minister.

Along with the acquisition per se came "offset contracts" to the tune of €1 billion, meaning direct foreign investments from Germany and business opportunities for Portuguese companies in the German market.

Under EU law, offsets are forbidden, except in the defence sector, where member states invoke a "national security" exemption.

As it turns out, a lot of these offsets were actually existing investments. Seven Portuguese executives and three Ferrostaal representatives have already been indicted. According to the public prosecutor's office, the Portuguese state was mislead in these deals and suffered damages of at least €34 million.

According to estimates by the European Defence Agency, 25 percent of the offsets in Europe are non-military and have no direct connection with the purchase.

"These contracts totally violate the EU's internal market competition rules," Portuguese Socialist MEP Ana Gomes told EUobserver. "They are contracts negotiated among companies with government favouring and in total disregard of the competition rules. There are plenty of reasons why the European Commission should investigate, and make it an exemplary case to deter such behaviour from now on from any member state."

So far, the commission has turned a blind eye to the non-military contracts occurring alongside large defence procurements.

A new "defence procurement directive" which needs to be transposed into national legislation by August 2011 is set to shed more light into the way such deals are done and restrict the areas in which governments can invoke the "national security" exemption to internal market rules.

Member states will need to prove that the offsets are necessary for the protection of security interests and not distort competition on non-military markets.

During his hearings as internal market commissioner, Michel Barnier said the defence offsets "bring about discriminations which contradict the [EU] treaty." While acknowledging the "traditions and sensibilities," he said these procedures had to be "put to an end."

But to Ms Gomes, the commission is missing an opportunity to "expose a very corrupt business that involves Portuguese, German companies, government officials and military people."

In a time of budget austerity and market jitters, the two submarines acquired by Portugal account for about 40 percent of its defence spending until 2023.

"We don't have money to equip properly our military and security forces, we are wasting this money in a very corrupt business and violating competition," Ms Gomes points out.

Voluntary code of conduct

A "voluntary code of conduct" adopted by all member states except Romania last year meanwhile puts some limits on offsets, such as requiring that the value of these contracts not surpass 100 percent that of the actual purchase.

Apart from being "voluntary," the code has also come under fire for lacking any reference to corruption, despite the fact that the defence sector is one of the most prone to this phenomenon, according to Transparency International.

"We would have hoped EU agencies required high standards, but this is not the case," Mark Pyman, the watchdog's defence expert told this website.

He also said that market-distorting deals are "clearly a question of internal market" for the Commission to investigate.

"We need clear guidance how governments conduct and audit offsets and an EU framework putting transparency at the core," he concluded.

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