THE NORTHROP SCANDAL

The reverberations of Saudi Arabia's procurement of over 80 Northrop F-SE/F's are still being felt today, even as the kingdom seeks to replace the top heavy aircraft with newer, sleeker trainer-fighter models. Saudi Arabia also bought F-SNB's from Northrop in 1971, the first phase of the contract, a few years before they bought the F-5EIF's. The deal was worth $4.2 billion.

The F-5's still have to be maintained until they are replaced. Three years ago, the Minister of Defense, Prince Sultan bin Abdul Aziz, pressured Northrop to award the maintenance contract to the Al Salam Aircraft Company, which was described as "poorly managed." (Mednews - Middle East Defense News, April 19, 1993). The joint venture company was established to handle the overhaul of both Royal Saudi Air Force and Saudia, the commercial carrier, aircraft. Al Salam's facilities at the Riyadh airport are inadequate because its overhaul hangars are not connected to the runway, rendering them inaccessible to planes, and because the hangars do not have an adequate power supply for the maintenance and repair work Al Salam was set up to do.

COST OF DOING BUSINESS

The public first received wind of Northrop's bribery payments to Saudi officials through a 1975 Securities and Exchange Commission auditors report. Northrop had already lost all credibility as an honest business. It's illegal contributions to then President Nixon's reelection campaign sparked public outrage in the wake of the Watergate affair. Here are the facts of the Northrop scandal as reported by the SEC In March 1972, at Saudi middleman Adnan Khashoggi's alleged request, Northrop paid him $250,000 above his usual fee. This money was to go to General Hashim M. Hashim, head of the Saudi air force, who would "make difficulties" for the firm otherwise, or, as Northrop chair, Thomas V. Jones testified, "mention was made of a problem with a general." Originally, the Northrop deal provided for a commission to be paid directly to the generals or the sale of 20 F-SB two-seat trainers and 30 F-SE single-seaters costing $35 million and $105 million, respectively. When the contract became a government-to-government contract through the U.S. Foreign Military Sales program, the general's commission provision was deleted. Khashoggi allegedly told Northrop that he had given the money to the general.

The following year Khashoggi was back for more. Hashim's m's successor General Asad Zuhair, was asking for $150,000 Northrop tried to get out of paying. Its resistance angered the general who raised his demand to $200,000. Northrop paid Triad that amount in August 1973 after acquiring Khashoggi's firm apply the $450,000 in bribes against future commissions and on the condition that Triad secure the third-phase contract which awarded $75 million for maintenance, spare parts, and training. Northrop got the contract.

The report also stated the Northrop paid bribes to a Saudi prince. The report did not identify him but news media reported Prince Khaled bin Abdullah received "commissions" from the contractor. Khaled allegedly threatened "If I get nothing, then I will make sure that Adnan gets nothing." According to the SEC report, Khaled's agents approached Northrop to pay commissions to the prince, who as a registered agent in Saudi Arabia was entitled to receive them. Khaled made over $500,000 between 1971 and 1973 for "unspecified services." The money was paid to his front company, Cantona Financial Establishment.

The publicity embarrassed the Saudi royal family who, up until that time, had been able to keep their receipt of illegal payments secret. Having commissions paid to the Saudi government (which is the royal family) as an official part of the contract was standard practice at that time. They were calculated as a percentage of the contract value and were to be paid to the government. However, the Northrop deal occurred in the wake of the Watergate hearings when public tolerance for political shadiness was at an all-time low. Publicity over the bribes led to a Securities and Exchange Commission investigation of Northrop.

As part of the settlement with the SEC, Northrop signed a consent order which includes a pledge not to conceal bribe payments from its shareholders.

PUBLICITY SHY

In the 1960's and 1970's, Adnan Khashoggi was virtually the only contact arms dealers had with the House of Saud. By 1970, he was the exclusive agent on 80%~of Saudi arms deals. The cost of his commissions were passed on to the Saudi government. Saudi citizens paid to make Khashoggi one of the richest men in the world.

In a biography about Khashoggi, author Ronald Kessler writes that the middleman "delicately balanced the aspirations of one member [of the royal family] against another, striving to make them all happy. He always took care to instinct Northrop not to send him anything in Saudi Arabia referring to his commissions. If the size of his fees got out, it would disrupt his role as ballast within the family." Northrop paid Khashoggi's fees to his various Swiss bank accounts. The SEC never investigated those accounts, through which he allegedly funneled money to Saudi princes.

Khashoggi, through Triad Financial Establishment, a part of Triad America Corporation which he jointly owns with his two brothers, was the middleman charged with securing contracts with Prince Sultan bin Abdul Aziz's Ministry of Defense. Triad America Corporation is the U.S. affiliate of Triad Holding Company, incorporated in Luxembourg, a country with very lax business-practice watchdog laws, and based in Beirut. The only way anyone could do business with Saudi Arabia was through an agent, so Northrop employed Khashoggi as its exclusive agent in deals with Saudi Arabia. His commissions were a line item in the contract. By 1975, Northrop had paid Triad $8.9 million. Northrop stopped paying the commissions after the Saudi government passed a law prohibiting such payments and after the U.S. Department of Defense told Saudi officials about the payments. Saudi officials reportedly told Northrop they did not approve of payments to a middleman and the Pentagon ordered Northrop not to pay the commissions. Northrop tried to break the contract, but could not get Khashoggi  consent to do so. When Northrop ceased payments, Khashoggi took the dispute to arbitration, in 1979, as delineated in the contract. He claimed Northrop owed him $153 million. The arbitrator ruled that Northrop must pay him $31.7 million of the money it had received from Saudi Arabia in payment for the aircraft. Khashoggi made a total of $184 million from the deal. In fact, Khashoggi has used his ties to Prince Sultan and King Fahd to secure a number of deals which increased his wealth to around $4 billion in the late 1970's. Defense industry watchers and Saudi experts do not believe the Khashoggi kept all of the Northrop commissions to himself.

SAUDI REACTION

The Saudi royal family cringed at the SEC probe and the resultant unfavorable press and its Council of Ministers passed a decision supposedly outlawing the kind of commission deal between Northrop and Triad. However, the decision, which has the force of law, is very weak and vague. Key terms such as "agent," "broker," "commission," "arms," and "armament" are not defined. Without such definitions, it is impossible to know just what the law is prohibiting. Also, there are no penalties for breach of the law. The only "punitive" measure provides that the Saudi government can deduct the amount of the commission from the price of the contract. As the government was paying the commissions, and since the decision only applies to commissions to be paid to the government, the law just eliminates an obvious paper trail showing that the royal family was stealing money from the government treasury.

After the ministers published their decision, the U.S. Air Force directed American defense contractors to stop including commissions as part of the cost of the contract, but it did not prohibit them from having commission payments as part of the deal. The Department of Defense's policy is if it is not in the written part of the contract, it is not their concern.

SOURCES