Arms and the Man: Something Rotten at IAI

Tens of millions of dollars were paid to an agent working on deals in the CIS. It appers too much was paid for too little, with no feasible explanation.

Attorney General Menachem Mazuz is till pondering the investigation of Moshe Keret, who was the CEO of Israel Aerospace Industries (IAI) for 20 years, until 2005. A few months ago Mazuz decided to close the case that the police had submitted, which dealt with Keret's ties with an arms dealer. According to a legal source, there was difficulty in making the findings, which aroused the suspicion of serious offenses, into legal evidence. And a police source said some witnesses avoided giving answers or claimed they don't remember details.

However, in September, 2007, Ometz (the nonprofit Citizens for Proper Administration, Judicial and Social Justice) appealed to the AG on his decision. The Justice Ministry says there is no decision yet on the matter.

About five years ago IAI employees complained about their "all-powerful" CEO and his close and peculiar relationship with an arms dealer (whose name is under gag order), who had been appointed the marketing agent of the aeronautics industry in Russia. Ometz lodged a complaint with the National Fraud Investigation Unit, where it sat like a bump on a log. Meanwhile the State Comptroller's Office launched an examination of IAI sales and marketing agents and their commissions.

Some of the state comptroller's serious findings about Keret and the agent were published in the report. But others were not for fear suspicions of bribes and illegitimate deeds abroad might harm Israel and IAI, in particular with Russia. Yehiel Horev, the head of the Defense Ministry security arm (MALMAB) delegated to investigators the task of examining the findings. He concluded there was cause for concern: apparently not only improper administrative arrangements but also criminal acts. Mazuz and the Israel Police were told.

The police again procrastinated. Police Major General Alex Ish Shalom, who had been seconded to serve as a special adviser to the state comptroller, had to intervene. Ish Shalom met with Police Brigadier General Yohanan Danino, then head of the International Crime Unit, and urged him to order an investigation be opened. Danino demanded (unnecessary) authorization from his superiors and from the Defense Ministry. The red tape continued to tangle until Danino was reassigned and replaced by Police Brigadier General Amichai Shai. He discovered that his predecessor had done nothing and ordered the desired investigation. He entrusted the task to Superintendent Aviad Dor-Hai, head of an investigation team at the security department of the International Crimes Investigation Unit.

Keret and the agent were arrested in September, 2005. The agent twice won a gag order to block publication of his name, the last time in August 2007, but Haaretz recently obtained information on the two that gives a glimpse into the murky world of arms dealers.

How it works

Here are the main points of the findings from the state comptroller, MALMAB and the Israel Police. IAI, the largest arms manufacturer in Israel, has in recent years been exporting up to $3 billion annually to dozens of countries. To promote sales it hires about 300 external agents and marketing consultants in addition to the market specialists it employs. The agents were to be a barrier between the manufacturer and the customer so the former could claim clean hands should suspicions of impropriety arise.

The arms dealer (say the reports) was appointed by IAI early in the 1990s as a sales promoter to the Confederation of Independent States (the former Soviet Union). Afterward the IAI factories and its subsidiary Elta also signed on his employment as a marketing agent. The contracts with him were renewed periodically until 2005 - when the police investigation was opened.

"There were expectations that the agent would bring extensive deals from the CIS and therefore a large number of contracts were signed with him - but in fact, the extent of the deals was less than expected. Nevertheless, the contracts with him were renewed," states one of the reports. The investigations, which were based on internal IAI documents, indicated that over 11 years, "IAI and Elta paid the agent millions of dollars." Elta made payments so as to acquire a plane in Russia that would serve as a "carrier" for innovative espionage equipment for the early-warning Phalcon plane that IAI and Elta built for China. The value of the April 1996 deal with China was an estimated $289 million. Acquiring the plane cost Elta $46 million.

A senior IAI official, David Lampert, recommended that the agent dealing with the matter would be selected from among six candidates. However, for some reason, the management of IAI appointed the agent in question instead. Another director, the head of the CIS desk at the Bedek Aviation Group (which mainly does aircraft renovation and maintenance) said it was possible to acquire the plane without an agent, in return for $3 million. Why the huge difference in price? One of the reports says: "There is a suspicion that the inflated price for the Phalcon deal served as a "special payment" for officials in the CIS in return for authorizing the deals. In addition, IAI paid millions of dollars to the agent, with some of these sums ostensibly intended for the same purposes."

Why was the marketing agent in question chosen for the deal? One of the reports states that "Lampert himself did not know who had chosen the agent and why, what the considerations were at all and whether alternatives that he had proposed had been examined. No documentation and/or justifications for choosing him rather than someone else have been found."

The contract for the purchase of the plane, in Russia, was signed in 1997. It did not stipulate the commission though an appendix said the rate would be 15 percent. The agent, with Keret's approval, even demanded 17 percent, but this was refused. But the calculations done by the State Comptroller's Office and the police show the agent received 17.61 percent - even more than he had demanded. "According to Keret's authorizations," says a report, "the agent was paid several million dollars, more than could have been paid."

The deal with China was ultimately scuttled under pressure from the United States, and China received $375 million in compensation. But Israel and IAI found a new customer for the Phalcon deal - India - at four times the price, a deal for about $1.1 billion. The India deal is still in the implementation phase, but the agent has received an advance of millions of dollars with many more millions promised.

Hefty commissions

Another perplexing finding, which is indicative of a vast network of relations that the agent developed with Keret, is that he was allowed "to receive a commission on all the deals that were made in the CIS by other IAI sales agents - even if he had made no contribution to these deals." (The reference Is to aircraft maintenance contracts - Y.M.) Nevertheless, the investigation found that "for those deals (he) is continuing to receive a commission of 10 percent on the receipts to this day." The police probe and the comptroller's check found, for example, that the agent received a hefty commission on the acquisition of an engine even though the deal was brought in by a Bedek employee. The reports from the state comptroller, MALMAB and the police give rise to questions about the fact the man was appointed at all to serve as an agent of IAI, "even though in the past suspicions had been raised as to his entanglement in financial matters."

And something else to wonder about: In agreements between IAI and the agent commission percentages were set for him, for the duration of the contract that were "excessive in comparison to what is customary for other agents," note the reports. And contracts with other agents explicitly stated they would receive no compensation if a deal was not implemented.

Moreover, IAI turned a blind eye to the fact that the agent "had collaborated with competitors of IAI, and therefore sometimes deals were not made between potential customers and IAI."

The agent's deeds are known to many IAI employees, and some expressed objections to him.

However, Keret and his senior directors ignored their protests, and complainers were even "punished" by being forbidden to travel to Russia. The agent "threatened IAI employees," says one of the reports, "saying he had power in the industry and therefore if they don't do as he demands, he will cause them harm."

The affair's various investigators concluded that the appointment of the agent was "flawed" and says "it would have been possible to have dispensed with his services altogether."

So why did IAI and CEO Keret do what they did? The reports suggest a possible answer and indicate a problematic, four-way relationship: Keret's bureau chief was Ilana Kind. Her father, who has since died, was Adiv Aviram - an IAI acquisitions agent. Aviram, who was a failed businessman, had served as vice president of the Astor company and was active, in addition to other places, in Romania. The father and daughter incurred debts and faced bankruptcy. "The agent helped him with a loan," states one of the reports, according to the testimony of a legal adviser to IAI, who said the agent also came to Aviram's aid by hiring him as a salaried employee in one of his companies.

The IAI management has sent a laconic response: "The action and decisions in the matters in question have been taken by the official authorities."

A source at IAI said that the moment the police investigation began, all relations with the agent were suspended.

Keret has said in response that he has cooperated with the police: "I answered all the questions. I have been informed that the case has been closed and, as far as I am concerned, that's the end of the story."