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Posted on 01/08/2002 12:22:26 PM PST by SlickWillard

Princely payments
Saudi royalty, it is claimed, make out like bandits on U.S. deals

BY LINDA ROBINSON AND PETER CARY

On an unseasonably warm December evening, Richard Newcombe stepped off a jumbo jet in Washington, jet-lagged from a four-day trip to Saudi Arabia. The head of foreign assets control in the U.S. Treasury Department, Newcombe and his colleagues at the State Department and the National Security Council had made some progress getting the Saudis to help shut down global terror networks.

But it was like pulling teeth.

First, the Saudis had balked at freezing bank accounts Washington said were linked to terrorists. Then they demanded proof that Saudi-funded charities were funneling money to terrorists. On December 8, the first day of the Newcombe delegation's visit, Prince Nayef, the interior minister, was telling reporters he still did not even believe that 15 of the 19 September 11 hijackers were Saudis. "The truth is missing so far," he said. Now the Newcombe party was returning with only a promise that the Saudis would be helpful at the next meeting, in January.

Protection money. Strained relations between Washington and Riyadh are nothing new. But since September 11, tensions have increased markedly. One reason, high-level intelligence sources tell U.S. News, is that at least two Saudi princes had been paying, on behalf of the king-dom, what amounts to protection money to Osama bin Laden since 1995. In November of that year, a bomb at the Saudi National Guard headquarters in Riyadh killed several American military advisers who worked closely with the force. One source, a former senior Clinton administration official, said that the two princes, whose names have not been disclosed, began making payments to bin Laden soon after the bombing. The official added that Washington did not learn of the payments until at least two years later. "There's no question they did buy protection from bin Laden," he says. "The deal was, they would turn a blind eye to what he was doing elsewhere. 'You don't conduct operations here, and we won't disrupt them elsewhere.' "

Adel Al-Jubeir, a top Saudi official, denied the payments took place. "Where's the evidence? Nobody offers proof. There's no paper trail. . . . Why would they [princes] pay? These people threaten us more than they threaten you," he said. Meanwhile, the former Clinton official says the U.S. stance may be toughening. "I don't know if the Saudis have figured out that their strategy is a loser," he says. "But what's important going forward is to convince them now that this arrangement has to stop."

Protection money to a major terrorist would be a big enough irritant. But the Washington-Riyadh relationship is marred by another problem, and this one is just as well kept a secret. Over the past decade, the United States has sold Riyadh $33.5 billion in military hardware. That's more than Israel and Egypt combined have received. U.S. companies have also done billions of dollars in commercial business with the kingdom. According to well-placed Saudi sources and a review of several little-known lawsuits, Saudi agents and royalty often demand enormous commissions to accompany these deals. Ordinarily, the payment of such fees to secure contracts would constitute a violation of the U.S. Foreign Corrupt Practices Act. But prosecutors say bribery is one of the toughest charges to prove.

One recent prosecution, however, offers a rare glimpse into the shrouded world of Saudi business dealings. Last summer, the Securities and Exchange Commission and federal agents targeted a U.S. company named American Bank Note Holographics for, among other things, paying bribes to Saudi officials. The company, the SEC said, was trying to win a contract to produce holograms for Saudi bank notes. According to the SEC complaint, company officials "authorized and directed an ABNH employee to wire $239,000 to a Swiss bank account for the benefit of one or more officials of the Saudi Arabian government." ABNH paid a $75,000 penalty to the SEC last July without admitting or denying culpability. The company's president, Joshua Cantor, pleaded guilty to four criminal charges, telling the judge, "I believed that it was probable that some portion of this money would be paid to a Saudi official." The SEC noted that the amount of the bribe "comprised nearly 40 percent of the contract's value."

Special agents. Before King Faisal assumed the throne, in 1964, Saudi princes lived off huge government stipends. That practice was gradually replaced to allow them to collect commissions–sometimes hundreds of millions of dollars–on deals they negotiated. At the time, such payments were legal. In 1978, however, the Saudi government decreed that any foreigner doing commerce with the kingdom would have to have an agent, whose fee would be capped at 5 percent of a contract's value. But determining whether legitimate projects disguise illicit payments isn't exactly easy. "Need to buy vehicles for use in the project? Buy them from an in-country dealer specified by the Saudi helper," says one military contractor who has worked in Saudi Arabia. "Need a contractor to construct an airport, runways, hangars, maintenance facilities? Follow the same procedure. . . . [But] the payment of exorbitant commissions to individuals–royalty or royalty-connected–who do nothing but line their pockets with money is another matter."

In some instances, court filings claim, the lining of pockets is done quite circuitously. In one case, an executive named Stephen Reddy claimed that his employer at the time, Litton International Development Corp., paid illegal fees and commissions to Saudi officials, then fired him when he refused to cooperate with the schemes. (Litton countered that Reddy was fired as part of a general layoff of 100 people, that he demanded a settlement, and that when he didn't receive any, he began filing groundless lawsuits.) According to Reddy's final complaint, filed in 1994, Litton paid between $47 million and $183 million in corrupt fees, commissions, and kickbacks to Saudi officials from 1979 to 1990 in return for the award of two contracts totaling $2.3 billion. One of those was a 1979 contract worth $1.5 billion to provide control systems for the Saudi Air Defense Command Center.

The eight-year contract required Litton to provide housing for its personnel in Saudi Arabia. Reddy was the housing program manager. He outlined a scheme under which a housing contract allowed for pass-throughs of $115 million to Saudi royalty. Reddy's suits were dismissed for various reasons of legal standing. Litton then sued him and his lawyers for malicious prosecution but lost its case. Reddy declined to discuss his lawsuits.

Others have claimed similar conspiracies. A former Army lieutenant colonel and attaché to the Saudi Defense Ministry named Thomas Dooley sued Sikorsky Aircraft and its parent company, United Technologies Corp., in the early 1990s. According to his complaint, the companies conspired to make payments to Saudi officials to nail down a $130 million sale of 13 Black Hawk helicopters. Dooley, then Sikorsky's Saudi sales representative, said in court papers that the agent for the deal, Ibrahim A. al Namlah, hit up Sikorsky for a "bonus" of 3 percent to 5 percent of the total, part of which was for Prince Khalid and Prince Fahd, sons of the defense minister, Prince Sultan.

According to the court documents, Sikorsky was awarded a $40 million collateral contract for helicopter-support services, part of which went to a joint U.S.-Saudi venture for personnel support. The U.S. firm did all the work, but the arrangement also funneled money to al Namlah, who passed part of it on to Khalid and Fahd. The defendants denied all of Dooley's claims of wrongdoing and denied that any Saudi princes were involved in such schemes.

Dooley, who said he was fired by United Technologies when he protested the alleged scheme, had been seeking damages of $130 million. His suit was settled out of court in July 1993. The agreement precludes all parties from discussing the terms. "I can't talk about it," says Michael Madigan, a Dooley attorney. "I can only smile when asked about it." Justice Department lawyers said they found no violation of the Foreign Corrupt Practices Act.

Bloated contracts. Companies doing business with the kingdom seldom complain about the fat agent fees, knowledgeable sources say, because Saudis are willing to inflate a contract's value to cover the amount of the commission. That, according to a former U.S. official posted to Riyadh, is what happened in the "al Yamamah" ("dove," in Arabic) sale of British Tornado jets to the kingdom. The jets are generally priced at $20 million to $25 million, but the Saudis agreed to pay $70 million apiece through a complicated oil-arms barter arrangement. Stories and rumors of payoffs were never proved, but similar charges of price inflation to support payoffs have shown up in other lawsuits.

Even Prince Bandar bin Sultan, the ebullient Saudi ambassador in Washington, has freely acknowledged that there is corruption in the kingdom. In an interview with the PBS program Frontline, Bandar spoke of his country's $400 billion development program. "You could not have done all of that for less than, let's say, $350 billion. If you tell me that building this whole country, and spending $350 billion out of $400 billion, that we misused or got corrupted with $50 billion, I'll tell you, yes," he said. "So what? We did not invent corruption."

Corruption or not, America loves the Saudi business. In the early 1990s, AT&T, as well as a French-led consortium of Alcatel and the Swedish Ericsson, was competing to win a $4 billion contract to modernize the desert kingdom's creaky telecommunications systems. After two visits from U.S. Commerce officials, Secretary of State Warren Christopher met King Fahd on April 27, 1994. Christopher spoke up for AT&T. Meanwhile, President Clinton wrote a letter to the king asking that AT&T receive every consideration in the competition, the Wall Street Journal reported. For its part, AT&T had hired the well-known A. S. Bugshan & Bros. Group as its registered agent in the kingdom. And, it turned out, sitting in a meeting about the award of the contract was one of the kingdom's younger princes.

Much to the ire of Alcatel and Ericsson, AT&T got the contract. Two separate sources close to the royal family and Saudi business say it became the talk of these circles that the young prince lobbied to get a cut of the deal.

By the rules. John Heindel, who was head of AT&T in Saudi Arabia and is now president of Lucent Worldwide Services, which implemented the contract, told U.S. News: "I've heard all of these stories, and none of them are fact-based. I'd deny them vehemently." He noted that the Foreign Corrupt Practices Act bans such payments. AT&T, seconding Heindel's denials, does not dispute that the agent, Bugshan, got its legal commission, which may have reached $200 million.

While American companies don't complain about the outsize commissions, they are unhappy about investments in Saudi-owned businesses that Riyadh requires of most companies selling to the kingdom. David Hamod, the U.S. representative of the American Business Council of the Gulf Countries, says these so-called offsets can germinate new companies and provide jobs. But he also acknowledges that they can be vehicles for abuse: Sometimes, he says, "it gets bogged down in inefficiencies and perhaps even corruption." The practice of requiring agents does not mean corruption is endemic, Hamod adds, but he notes the World Trade Organization doesn't admit members with such rules.

The Saudi government, which is keen to join the WTO, has just softened the requirement that foreigners must have agents. The clearest sign of change, says Saudi oil analyst Nawaf Obaid, is that the government forbade the use of agents and the paying of commissions in its latest foreign-bid project. The Natural Gas Initiative, as it is called, represents a staggering $25 billion investment–and that's just for starters. The big winner was ExxonMobil, which will lead two of three joint-venture projects. Saudi officials were so intent on avoiding any unseemly backroom deals that all bidders were required to take a very unusual step: They signed agreements voiding their contracts if they were found to have paid bribes.

With Edward T. Pound, Megan Barnett, Lisa Griffin, and Randy Dotinga

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