By Andrew Feinstein
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The close relationship the arms trade has with the state means any deal would expose some uncomfortable political truths
Merger talks between defence industry giants BAE Systems and EADS may have collapsed. But the disturbing realities of the global arms trade mean it would always have been a difficult deal to close.
A large part of the reason for this is the extremely close and complex relationships weapons manufacturers, perhaps more than in any other sector, have with their governments and intelligence agencies. This is a consequence of their role in foreign policy, national security and their ability to collect intelligence wherever they operate. They often have close links to political parties too, especially in Germany, as a result of their generous donations. These roles afford them proximity to those at the apex of power. Relationships are reinforced by the revolving door for personnel between corporations and government.
As a result, defence companies are insulated from the cold winds of market competition. We can see this not only in the extent of subsidies doled out to the industry globally, but also in the fact that most arms companies fail miserably when attempting to operate outside the confines of multibillion-pound state contracts with guaranteed profits. And in an industry that accounts for about 40% of all corruption in world trade, defence companies are often protected from the full legal consequences of their sometimes nefarious actions by their home governments.
BAE was spared the massive legal fallout from paying about £6bn in “commissions” on the al-Yamamah deal with Saudi Arabia by the direct personal intervention of Tony Blair in the dying days of his premiership. The company was then fined a derisory £500,000 for “accounting irregularities” on one transaction, in return for which the Serious Fraud Office dropped advanced investigations into corruption in five highly controversial arms deals.
EADS has also faced its share of corruption investigations. An EADS subsidiary, GPT Special Projects, is alleged to have made £14.5m in suspicious payments to two Cayman Islands-based entities as part of a £2bn military communications contract between the UK and Saudi Arabia. The recipients received 14% of the equipment budget on the contract, yet appear to have provided no equipment or services.
Had the merger talks between BAE and EADS continued it would have been interesting to see how BAE approached these allegations. The company’s settlement with US authorities means it is obliged to hand over to the US department of justice any information that it comes across relating to possible corruption. BAE could hardly have undertaken meaningful due diligence without being made aware of details of the GPT case.
This conundrum illustrates the complexities of the merger. German, British and, to a lesser extent, French and Spanish law enforcement authorities would have had to co-operate in unprecedented ways to protect the merged entity along the lines currently enjoyed by the constituent companies. State support in the form of research and development grants, financial protection and other subsidies would have been a nightmare to agree and manage.
The failure of the merger has probably saved many hours of Anglo-German wrangling over political, economic and law enforcement issues. But there remains an urgent need to impose greater transparency on the relationship between governments and their arms companies, and for those companies to face the judicial consequences of their malfeasance. Unless governments take meaningful action, this industry that counts its profits in billions and its cost in human lives will continue to make the world a poorer place, a less democratic place, a more corrupt place and arguably a more dangerous place.