German Submarine Sales to Portugal

See also: The Greek Submarine Deal.

Introduction

Submarine sales seem to be particularly prone to bribery. They are complex, once-in-a-generation (for most countries) purchases. Prices are difficult to compare in a meaningful way. Further, submarines offer most countries little practical military use in the 21st century security context. A stealthy, underwater vehicle, they also seem to be a powerful vessel for concealing corrupt payments. Very often, the bribes, like the submarines, can be hard to detect and pin down. Portugal’s 2004 acquisition of two German submarines is such a case, where the payment of bribes has been established in a German court, but no-one in Portugal or elsewhere seems to be guilty of receiving them. The Portuguese investigation was closed in 2014, with no convictions.

Key Facts

Buyer country: Portugal

Seller companies and countries: ThyssenKrupp, HDW, Ferrostaal (Germany)

Year deal signed: 2004

Equipment sold: 2 Type-209 submarines. Option (not exercised) on a third.

Value of deal: EUR 833 million

Sum involved in corruption allegations: EUR 30 million. Potentially an additional EUR 34 million in relation to offsets programme

Dramatis Personae

Paolo Portas – Portuguese Defence Minister in 2004; signed submarine deal.

Hans-Dieter Mühlenbeck – ex-Ferrostaal manager; pleaded guilty to bribing Greek and Portuguese officials in German court in 2011.

Johann-Friedrich Haun – ex-Ferrostaal manager; pleaded guilty to bribing Greek and Portuguese officials in German court in 2011.

Jurgen Adolff – former Portuguese honorary Consul in Germany; accused of receiving EUR 1.6 million bribe in relation to submarine deal. Acquitted.

ESCOM – UK consultancy firm; received EUR 30 million payment for brokering deal.

The Arms Deal

Portugal decided to buy three new submarines in 1997, and issued a tender in 1999. In 2003, the German Submarine Consortium, of Howaldtswerke Deutsche Werft (HDW), Thyssen Nordseewerke and MAN Ferrostaal was selected over a rival French bidder, and the number of submarines purchased reduced to two. The contract was for a ‘base price’ of EUR 769 million, but an agreed formula allowed for a daily increase in price until the day the contract entered into effect; by the time this happened in September 2004, after delays by the Portuguese Ministry of Defence in sending documentation, the final price was EUR 833 million.

An offsets package of EUR 1.2 billion to be invested in Portuguese industry, military and civil, was included in the deal.

Corruption Allegations

A British company, ESCOM, was hired by the Portuguese Ministry of Defense to act as brokers for financing the deal, and for managing the offsets programme. ESCOM was paid EUR 30 million, from which it is alleged that bribes were paid to Portuguese decision-makers. Among the suspected bribe payments were over EUR 1 million paid in cash into the accounts of the Portuguese Christian Democrat Party of Defence Minister Paolo Portas, EUR 1.6 million allegedly paid to a Portuguese Honorary Consul in Berlin, Jürgen Adolff, and EUR 1 million paid to a Portuguese Rear Admiral. None of this was ever proved, however.

Suscpicions also centered around the offsets contract, which was only 25% fulfilled by 2010, although it was supposed to be complete by 2012. Fraud relating to the offsets contracts were suspected of costing the Portuguese taxpayer up to EUR 34 million. Offsets are considered a major corruption risk in arms deals, as the details of such deals are generally completely opaque. This makes it relatively easy for arrangements to be made to steer offset investments and counter-trade purchases to favoured companies in the recipient state, for example companies owned by individuals connected to key decision-makers.

Investigations and Outcomes

Portuguese prosecutors began investigations in 2006. Judicially authorized wiretaps suggested that the Christian Democrat Party had received kickbacks relating to the deal in 2004, paid by the broker company ESCOM. The investigations related both to the deal itself and to the offset contracts, alleged to have involved corrupt dealing. Ten individuals, including three Germans (of whom two were MAN-Ferrostaal executives) and seven Portuguese, were charged with falsifying invoices in relation to the offsets programme, but were acquitted in a Portuguese court in 2014.

Investigations were also carried out in Germany as part of broader investigations into corruption by Ferrostaal (which separated from MAN in 2012). Two former Ferrostaal executives, Hans-Dieter Mühlenbeck and Johann-Friedrich Haun, pleaded guilty to bribing Greek and Portuguese officials with EUR 62 million (with EUR 1.6 million going to Portugal), in relation to the sale of submarines to the two countries. They were sentenced to fines and suspended prison sentences in December 2011. Ferrostaal agreed with German prosecutors to pay a fine of EUR 140 million.

Also in Germany, a Portuguese honorary consul, Dr. Jürgen Adolff, was investigated for allegedly receiving EUR 1.6 million in bribes to influence the Portuguese government in favor of the German submarine consortium. In documents seized from Dr. Adolff’s office, he describes how he arranged meetings between consortium executives and the Portuguese Prime Minister, Jose Manuel Barroso, among others. Dr. Adolff was convicted by a Munich court in 2014, but acquitted on appeal in 2015.

The Portuguese investigation was hampered by a lack of resources, the replacement of the prosecutorial team in 2010, the disappearance from the Portuguese Ministry of Defense of key documents relating to the contract, and a lack of cooperation from the German authorities in sharing evidence. Since the Ferrostaal executives had pleaded guilty, the evidence against them was not presented in court.

The Portuguese investigation was closed in December 2014, due both to difficulty in obtaining evidence and the expiration of the statute of limitations for any corruption-related crimes that might have been committed.

Sources

“Ferrostaal,” TRACE Compendium, https://www.traceinternational.org/TraceCompendium/Detail/79?class=casename_searchresult&type=1.

Ana Gomes, “Complaint to the EC Commission regarding infringement of the community laws,” Feb. 3, 2012, http://www.anagomes.eu/PublicDocs/66e9cd99-93f0-481a-8306-1e78d84cb8dc.pdf.

Luis de Sousa, “Dealing in the dark: Portugal’s sad defence contracts,” Transparency International blog, Sep. 3, 2012, http://blog.transparency.org/2012/09/03/dealing-in-the-dark-portugals-sad-case-study-on-defence-procurement/.

“Justiça portuguesa arquiva caso dos submarinos,” Esquerda (online), Dec. 18, 2014, http://www.esquerda.net/artigo/justica-portuguesa-arquiva-caso-dos-submarinos/35181.

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