National Judicial Academy, Bhopal

TOPIC: Industries at risk due to economic crimes: Aerospace and Defense

Submitted by:

RaghaviViswanath

III year, BA LLB(Hons.)

National Law Institute University, Bhopal

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ACKNOWLEDGEMENTS

I would like to express my heartfelt gratitude to Director Ma’am, Prof. Geeta Oberoi for her unstinted

support without which this report would not have been possible.

I would also like to thank the Library Officials for their resources which have been extremely useful

in the making of this report.

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INTRODUCTION

Since the Bofors scandal, India has been recuperating from the economic losses and the reputational

stakes involved in corruption and allied economic crimes in the aerospace and defense sectors in the

nation.

The Global Economic Crime Survey released by PricewaterhouseCoopers in2014, reported that 40 %

of the executives in the merging eight region (which includes Brazil, India etc) and 41% of

executives in US reported economic crimes. In the types of crimes reported, the US and UK also

shared more similarities than the UK, Russia and India.

The survey also demonstrates the differences across cultures in the way executives respond to

employees who commit financial crimes, such as the misappropriation of assets, accounting fraud and

bribery. These findings contradict common wisdom about cultural similarities. For example, the

pattern of responses to employee fraud is more similar among UK, Russian and Indian executives

than between UK and US executives.

Territory Reported Fraud 2014 Reported Fraud 2011

Africa 50% 59%

North America 41% 42%

Eastern Europe 39% 30%

Latin America 35% 37%

Western Europe 35% 30%

Asia Pacific 32% 31%

Middle East 21% 28%

Emerging Eight* 40% 35%

Global 37% 34%

*Emerging Eight include Brazil, China, India, Indonesia, Mexico, Russia, Turkey, and South Africa

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The figure below represents the varying occurrences of economic crimes. Figure 8: Trends in expectations of economic crime

Asset misappropriation 40

33

Cybercrime 30

26

Bribery and corruption 29

23

Accounting fraud 16

14

Money laundering 14

10 Competition law/antitrust law

1116

0 5 10 15 20 25 30 35 40 45

% of all respondents

2014 Global

2011 Global

The pie-chart below represents that 80% of the economic offences reported in India are on account of

internal fraud whereas 20% amounts to external fraud.

Percentage of internal and external reported frauds

Internal fraudExternal fraud

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DEFENSE PROCUREMENT POLICY

All defense acquisitions in India follow the procedure that has been enumerated in the Defense

Procurement Policy, the latest of which released in 2013. The amendments to the DPP 2013 are now

underway and a revised policy is slated to release in the coming months of 2015. The stages of

defense procurement have been explained below:

Standard Procedure

1. Formulation of Service Qualitative Requirements (“SQR”) – SQR is a list of technical and

desirable parameters relying on which the procurement made. SQR is prepared by the user directorate

of the individual defence service headquarter, on the basis of the information received pursuant to the

Request for Information (“RFI”) issued to the venders. SQRs are finalized by the Headquarters of the

Indian Defense Services (“HQIDS”).

2. Acceptance of necessity – The service headquarter submits the Statement of Case (i.e., containing

details such quantity to be procured, price for consignment) along with the SQR to the DRDO, the

administrative and financial board of Ministry of Defense and Department of Defense Production.

After these approvals, the HQIDS looks for commonality in the SQRs of the three services.

4. Categorization Committee – The Committee gives a preference to the Indian vendors during the

capital acquisition process. While acquisitions less than 150 crores are approved by the categorization

committee, those exceeding 150 crores are directed to the Defense Production Board and acquisitions

exceeding 300 crores to the Defense Acquisition Council.

5. Solicitation – Tenders are issued on the website of the Ministry of Defense. However, the

operational requirements are not available to the public.

6. Technical Evaluation Committee – Bids are evaluated by a Technical committee on the grounds of

feasibility.

7. Field Evaluation

8. Staff Evaluation

9. Oversight by Technical Oversight Committee (“TOC”) for acquisitions above 300 crores. .

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10. Commercial negotiations by Contract Negotiation Committee (“CNC”).

11. Approval of Competent Financial Authority (“CFA”).

12. Award of contract / Supply Order (“SO”).

13. Contract Administration and Post-Contract Management

CLASSIFICATION OF DEFENSE PROCUREMENTS AS PER DPP 2013

The defense procurement regime is governed by the Defense Procurement Policy, 2013. It applies to

all acquisitions made by the defense sector excluding acquisitions made by the Defense Research and

Development Organization (“DRDO”), Ordnance Factory Boards (“OFBs”) and Defense Public

Sector Undertakings (“DPSUs”). The ambit of the DPP extends to both capital acquisitions from both

indigenous and foreign sources. The following are the means of acquisition (in order of priority):

a) Buy (Indian): Means the outright purchase is from Indian vendors only.

b) Buy and Make (Indian): Means the purchase is from an Indian vendor followed by licensed

manufacture from an independent vendor in the country.

c) Make (Indian): Means that all processes take place indigenously.

d) Buy and Make (Global): Means that the purchase is from a foreign vendor while license and

production is in India.

e) Buy (Global): Means that the outright purchase is from Indian and foreign vendors.

The following types of procedure have been prescribed under the policy:

a) Normal

b) Fast Track: This is the procedure followed when there is an urgency regarding the

procurement.

c) Inter-Governmental Agreements: These agreements are executed with friendly nations, where

technology is taken on lease, or shared in accordance with military exercises and programmes.

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IDENTIFYING THE PROBLEMS IN INDIA’S DEFENSE PROCUREMENT POLICY

SERVICE QUALITY REQUIREMENTS (SQR)

There are two types of parameters required in the SQR: essential parameters & desired parameters.

They form the premise of the entire tender policy for procurement. The formulation of the SQR is

based on the Request for Information (“RFI”). In order to make broad based SQRs, required inputs

will be obtained by issue of RFI on MoD website by Service Head Quarters/and by corresponding

with maximum manufacturers. The RFI entails the following:

(a) specification of technical parameters of equipment available in the world market;

(b) factors to be examined while assessing cost, including maintenance and support costs; and

(c) approximate cost estimation and to suggest alternatives for meeting the same objective as

mentioned in RFI.

PROBLEM IDENTIFIED: Firstly, the assessment and formulation of the SQR is largely based on the

technical expertise of the vendors, through the RFI. The vendors’ inputs would be based on their

individual capabilities. As a result, India is not going to be capable of bridging the gap between status

quo infrastructure and the standard of defense infrastructure whereby the state-of-the-art technology

investments made by foreign vendors can be absorbed. Secondly, on account of the leverage that is

now conferred on the vendors, India faces considerable risk of becoming the dumping ground for

outdated technology.

TEDIOUS APPROVALS

As noted above, the SQR is submitted to a series of defense agencies such as the Service

Headquarters and the Defense Research and Development Organization for inputs and suggestions.

Furthermore, the commonalities in the SQR requirements of the individual defense services is

examined at the level of the Joint SQR Committee( during the process of finalization of the SQR’s)

as well as the Head Quarters of the Indian Defense Services( during the process of seeking

acceptance of necessity). As opposed to SQR’s, there are also certain intergovernmental agreements

which are executed with friendly nations on the advice of the Armed Forces and the joint military

exercises conducted with such countries in the past. There is no standardized contractual document

that governs the execution of intergovernmental agreements and therefore such agreements are

precluded from seeking approvals from defense agencies.

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PROBLEM IDENTIFIED: SQR’s are decided by the User Directorate who does not possess the

requisite technical expertise to evaluate the merits of the parameters involved. In fact, the approval

procedure is dominated by bureaucrats and this contributes to the inherent redundancy in the

mechanism itself.

Secondly, while on the one hand, the approval procedure is extremely tedious for ordinary

procurement contracts entered into with foreign vendors, on the other hand, there is a glaring lack of

scrutiny in the case of intergovernmental agreements. In both situations, corruption goes unchecked

and therefore it is necessary to arrive at a middle-ground with the objective of simplifying the

approval mechanism.

OFFSET REQUIREMENTS

Offset requirements are stipulated percentages of the capital acquisition that is invested in India by

incurring the indigenous cost of manufacture or licensing. Presently in India, the DPP prescribes 30%

mandatory offset for the Buy (Global) and Buy and Make (Global) forms of capital acquisition. The

new Defense Procurement Procedure (“DPP”) (slated to be released in 2015) proposes to increase

offset requirement to 40% and 60% in Buy (Global) and Buy and Make (Global) respectively.

PROBLEM IDENTIFIED: Indian infrastructure is not in a position to absorb the state-of-the-art

technologies brought in by the foreign vendors. The immediate effect is two-fold: Firstly, there is a

need for greater investment in indigenous manufacture. Second, the poor level of infrastructure

disincentivises foreign vendors from making more investments. The DPP does not identify the

specific areas in which offset capital investment is to be made. Increasing offset requirement is laden

with the risk of deterring the foreign vendors from making capital investments in the first place.

Therefore, the short-term goal of being defense-ready is to be cautiously evaluated against the long-

term goal of building a sustained defense infrastructure model.

PRIVATE DEFENSE INDUSTRY

The domestic private defense industry is largely kept outside the purview of the preliminary

discussion with regards to the formulation of the SQR’s. Their inputs are solicited only at the stage of

the Categorization Committee. The 2015 DPP policy proposes to corporatize the private defense

sector and assign them as strategic partners, on par with the Defense Public Sector Undertakings

(which handles the manufacture of strategic requirements) and Ordnance Factory Board ( which deals

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with manufacture of law-technology equipment). This proposal is premised on the demarcation of

strategic defense procurement from general government purchases.

PROBLEM IDENTIFIED: Considering the agility, innovation and modern management practices of

the private defense industry, it is the most equipped to facilitate the transfer of technology that is

required to meet the standards of indigenization. However the minimal involvement of the private

defense industry in the development of the SQR contributes to their lack of preparedness at the point

of entering into the procurement contract. This adds to the lag in the procurement and the capital

acquisition.

BEST PRACTICES AROUND THE WORLD

Serial

number

1.

Country

USA

Procedure followed

Categorization:

The Under Secretary of Defence for Acquisition, Technology and

Logistics oversees the defence procurement carried out by the

Department of Defence. The statutes and policies that regulate

DoD procurements and the award of contracts are identified and

implemented in U.S. procurement regulations, including the

Federal Acquisition Regulation (FAR) and the Defense FAR

Supplement (DFARS). Rules unique to a particular DoD

Component are addressed in that Component's FAR Supplement

(e.g., Air Force FAR Supplement).

The Source Selection Committee:

a) A more experienced official is assigned to major

acquisitioned and he cannot be appointed for any other

project.

Process:

Competitive procedures other than full and open competition are

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authorized in a limited number of circumstances. It follows a

competitive bidding system for grant of contracts. This process can

be through:

(a) Sealed bidding- non-complex items that operate on the

lowest price method

(b) Negotiated Procurement- A trade-off is made in case of

strategic between technological value and cost on the basis

of greatest overall benefit.

Individual Services execute their own defence procurement

exercise their best commercial judgment in arriving at a

procurement policy. There is a centralised agency (Procurement

Contracting Officer) responsible for taking all approvals.

All Officers part of the Source Selection Committee are trained to

do so by professional officers. This Committee lays down

parameters for procurement and consists of two organs:

a) Source Selection Advisory Council- In certain situations,

when the

b) Source Selection Evaluation Board- comprises of distinct

teams for assessment of cost, technology, past performance.

While market research is a part of the evaluation of technology and

cost, the officers in the Committee are specially trained to make

such determinations.

In order to maintain transparency, all non-governmental officers

involved in source selection process are required to sign non-

disclosure agreements. They are also obligated to submit

documentation to the PCO indicating their personal stockholdings

before being allowed access to sensitive source selection

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information.

An unfavourable decision regarding a bid protest can be reviewed

by a third party or in a court of law.

2. UK Categorization: There are three organs in the Department of

Defence.

a) Equipment Capability Customer (ECC)- It determines

equipment capability requirement to meet current and

future requirements of the armed forces.

b) Defence Procurement Agency- It consists of Integrated

Project Teams that are responsible for the delivery of

equipment solutions to meet the requirements specified by

the ECC.

c) Defence Logistics Organisation (DLO) - Its objective was

to bring together the three single Service logistics

organisations and to establish a consolidated approach to

the in-service management of defence equipment and

stores, as part of the ‘through life approach’ of Smart

Procurement. The SPI envisaged that an IPT would transfer

to the DLO toward the end of the manufacture phase of a

programme and remain there through to the point at which

the asset was disposed of.

Process:

A User Requirements Document (URD) is issued by the ECC

outlining the user’s needs for a particular capability. An IPT,

tasked to deliver the programme will involve the Industry and seek

Expressions of Interest from interested companies to identify the

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performance, cost and time parameters for the programme. A

Systems Requirement Document (SRD) is then produced, defining

what the system must do in order to meet the user’s needs as stated

in the URD. This is followed by the bidding process.

Depending on the value of the contract, IPT leader would present

his recommendation to the IAB [Investment Approvals Board]. If

the program is above 400 million dollars, then the approval of IAB

and Overseas Planning Committee is required. If it is lower than

400 million dollars, it can still be approved by IAB, in the event of

some potentially controversial procurement or an ambiguous

unclear requirement.

Furthermore, specialist advice is solicited even before the URD is

issued in order to prevent excessive reliance on the information

provided by vendors.

Private Sector:

UK has a more globalised, open, competitive, free market

approach. Public Private Partnerships are becoming increasingly

popular in UK due to Private Finance Initiatives (PFI). Under the

PFI, the Government’s own capital funding resources are used only

when “PFI has been demonstrated to be unworkable, inappropriate

or uneconomic”.1 It offers greater potential for transferring risk to

the private sector, while benefiting from additional capital

investment. It encourages innovation in its procurement solutions

and provides the incentive to deliver the service to time, cost and

performance targets.

Time Lag: Slippage and delays continue to be a problem and are

1Ministry of Defence, The Acquisition Handbook, 4th Edition, January 2002, p.22

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attributed to a mixture of over-optimism and systemic factors.

3. FRANCE Categorization:

The first principle of the procurement-policy is to use the widest-

scope competition (at all levels) whatever may be the level in the

functioning of the system.

One single executive agency within the Ministry of Defense, the

DélégationGénérale pour l’Armement (DGA), was made

responsible for the contracting and management of all weapons

programs, from initial inception to delivery, including export sales.

The head of the DGA reports directly to the Defense Minister and

is ranked above any military officer.

Centralization has enabled the French state to engage in

multiservice procurements and to consolidate R&D programs to

avoid redundancy. In some cases, it has been possible to develop a

single weapon system for all three armed services, such as the

Mistral air-defense system, or a basic airframe that is then

modified for Air Force and Navy missions, such as the Rafale

fighter. More frequently, the DGA funds joint programs to develop

technologies of use to all three services, including missile

guidance, command-and-control systems, and logistics

management; these technologies are then incorporated into service-

specific weapon systems.

Process:

France follows a policy of competitive bidding which is just one of

many mechanisms to transmit information across organizations (in

this case, between the buyer and the potential sellers). The

complexity of the project at stake is a key factor to determine

whether competitive auctions are the optimal information

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transmission device between buyer and seller.

A drawback of the French procurement system is its lack of

accountability to the Parliament and the public. Hidden behind a

veil of secrecy, DGA technocrats make procurement decisions in a

top-down manner, and the lack of effective legislative oversight

mechanisms enables the DGA and the defense industry to shield

themselves from objective criticism

4. CHINA Technical Expertise:

The request to import a weapon system is included in the proposals

of the State Planning Commission (SPC) and the Ministry of

Foreign Trade and Economic Cooperation, and is sent to the

Central Military Commission (CMC) and the State Council for

approval. Thereafter, joint groups of experts from the PLA

(Peoples' Liberation Army), manufacturing enterprises and R&D

institutions are formed to study the technical performance,

specifications, quality and ease of supply of the items to be

imported, the training they would require and software needed.

Indigenization:

To develop its indigenous capacity and approach its goal of self-

reliance, China has tried to avoid purchasing many finished

weapon systems and has focused instead on obtaining production

technology through licensing agreements. Only a small number of

weapon systems, their key components, test equipment and

production know-how are imported. Related technologies are

absorbed and upgraded to meet local requirements with the help of

local R&D.

In addition to the import of foreign arms and equipment, China has

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tried to upgrade its arms through technological cooperation with

foreign countries. China sent about 480 military delegations (or

groups) to 55 countries for the purpose of learning about weapon

and equipment technology or to establish cooperation on arms or

military procurement during the period 1979–87. 2

5. MALAYSIA Categorization:

In 1982 the Defence Industry Division formulated a National

Defence Production Policy (NDPP) in which defence items were

classified into three categories—‘strategic’, ‘essential’ and ‘non-

strategic’. The NDPP ‘recognized the need to be self-reliant in the

production of strategic items and leaving the non-strategic items to

be produced by semi-government agencies and in the private

sector’.

In certain fact situations, a distinction has been made with regards

to Major Equipment and systems (MES) (for which a tender is

issued by the Ministry of Defense) and Non-MES items, for which

no tender is issued. These are either products which have a small

ratio of Malaysian participation or mass products which are already

manufactured in-country, in which case a Vendor Development

Programme (VDP) is applied to promote certain dual-use products

made by industries participating in the project.

Offset Agreements:

Malaysia follows a mandatory offset policy. Presently, there is a

minimum cap of 50% offset investment in technology transfer,

2 Example: Teams sent by the PLAN, the China State Shipbuilding Corporation and other authorities visited Germany, Sweden, the UK and the USA many times and finally decided on purchasing the naval gas turbines from the General Electric Company in the USA; the diesel engines and control and monitoring system from Motoren- und TurbinenUnion Friedrichshafen GmbH (MTU) of Germany; the gearboxes from Renk of Germany; and the controllable pitch propellers from KaMeWa of Sweden.

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domestic manufacture, etc. However, the government seeks to raise

it to a 100% offset agreement.

Initially, the offset agreements were dependent largely on the

negotiation skills of individual project teams. In fact, there was

neither an official definition of offsets nor a formal offset policy

delineating the credit targets, countertrade composition or the

standard operating procedures creating unnecessary complications.

This was rectified in 2005 when the Ministry of Finance finally

approved and institutionalised the country’s countertrade and offset

policy. This lack of a coordinated strategy in managing and

utilizing offsets in the early years impeded Malaysia’s efforts to

develop a sustainable defence industrial base. Offset packages have

now become the most crucial element in the procurement decision-

making process. The most common kinds of offsets are: (a)

technology transfer to maintain and modify equipment or

manufacture components; (b) training; and (c) technical assistance.

Malaysia previously did not impose penalty on offsets. But under

the new guidelines, a separate contract must be drafted for offsets

with performance bond.

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Typology of corruption in defense procurements

The following diagram illustrates the various steps at which there is risk of corruption in the pre and post- procurement stages:

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LIST OF ECONOMIC OFFENCES WITH REGARDS TO DEFENSE AND AEROSPACE

Type of economic offence Pertinent legislation Enforcement authorities

ForeignContribution

Manipulations

ForeignContribution

(Regulation)Act,

1976

Police/CBI/CID

Theft ofIntellectualProperty Copyright Act,1957

(Amendments1984&

1994)

Police/CBI/CID

Briberyand corruption of public

servants

Prevention of

CorruptionAct,1988 Anti-corruption Bureau/

Vigilance bureau/ CBI/ State

TaxEvasion Income Tax Act, 1961 CentralBoardof

DirectTaxes

EvasionofExciseDuty CentralExciseand

SaltAct,1944 CollectorsofCentral

Excise

MoneyLaundering ForeignExchange

RegulationsAct,1973 Directorateof

Enforcement

IllegalForeignTrade Import&Export

(Control)Act,1947 DirectorateGeneralof

ForeignTrade/CBI

ComputerCrime/CyberLaw Copyright Act,

1957/I.T.Act2000

Police/CBI/CID

List of offences with regards to defense and aerospace:

Section 7 of the Prevention of Corruption Act,1988 (hereinafter referred to as the “POCA”)

reads:

Public servant taking gratification other than legal remuneration in respect of an official act

Whoever, being, or expecting to be a public servant, accepts or obtains or agrees to accept or

attempts to obtain from any person, for himself or for any other person, any gratification whatever,

other than legal remuneration, as a motive or reward for doing or forbearing to do any official act or

for showing or forbearing to show, in the exercise of his official functions, favor or disfavor to any

person or for rendering or attempting to render any service or disservice to any person, with the

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Central Government or any State Government or Parliament or the Legislature of any State or with

any local authority, corporation or Government company referred to in clause (c) of section 2, or

with any public servant, whether named or otherwise, shall be punishable with imprisonment which

shall be not less than six months but which may extend to five years and shall also be liable to fine.

Explanation: (b) "Gratification." The word "gratification" is not restricted to pecuniary gratifications

or to gratifications estimable in money.

Section 8 of the POCAprescribes penalty for taking gratification, in order, by corrupt or

illegal means, to influence public servant extending from six months to five years, with or

without fine

Whoever accepts or obtains, or agrees to accept, or attempts to obtain, from any person, for

himself or for any other person, any gratification whatever as a motive or reward for inducing, by

corrupt or illegal means, any public servant, whether named or otherwise, to do or to forbear to

do any official act, or in the exercise of the official functions of such public servant to show

favour or disfavour to any person, or to render or attempt to render any service or disservice to

any person with the Central Government or any State Government or Parliament or the

Legislature of any State or with any local authority, corporation or Government company

referred to in clause (c) of section 2, or with any public servant, whether named or otherwise,

shall be punishable with imprisonment for a term which shall be not less than six months but

which may extend to five years and shall also be liable to fine.

Section 9 of the POCApenalizes taking gratification, for exercise of personal influence with

public servant with six months to five years imprisonment, with or without fine

Whoever accepts or obtains or agrees to accept or attempts to obtain, from any person, for

himself or for any other person, any gratification whatever, as a motive or reward for inducing,

by the exercise of personal influence, any public servant whether named or otherwise to do or to

forbear to do any official act, or in the exercise of the official functions of such public servant to

show favor or disfavor to any person, or to render or attempt to render any service or disservice

to any person with the Central Government or any State Government or Parliament or the

Legislature of any State or with any local authority, corporation or Government company

referred to in clause (c) of section 2, or with any public servant, whether named or otherwise,

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shall be punishable with imprisonment for a term which shall be not less than six months but

which may extend. to five years and shall also be liable to fine.

Abetment by public servant of offences defined in Section 8 or Section 9 of the POCA.

Whoever, being a public servant, in respect of whom either of the offences defined in section 8 or

section 9 is committed, abets the offence, whether or not that offence is committed in consequence

of that abetment, shall be punishable with imprisonment for a term which shall be not less than

six months but which may extend to five years and shall also be liable to fine.

Section 415 of the Indian Penal Code, 1860 defines cheating as:

Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to

deliver any property to any person, or to consent that any person shall retain any property, or

intentionally induces the person so deceived to do or omit to do anything which he would not do

or omit if he were not so deceived, and which act or omission causes or is likely to cause damage

or harm to that person in body, mind reputation or property, is said to “cheat”. Explanation : A

dishonest concealment of fact is a deception with the meaning of this section.

Section 420 of the IPC prescribes the offence of cheating and dishonestly inducing delivery

of property

Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to

any person, or to make, alter or destroy the whole or any part of a valuable security, or anything

which is signed or sealed, and which is capable of being converted into a valuable security, shall

be punished with imprisonment of either description for a term which may extend to seven years,

and shall also be liable to fine.

Section 120A of the IPC prescribes punishment for criminal conspiracy which can be defined

as :

When two or more persons agree to do, or cause to be done-- (1) an illegal act, or (2) an act

which is not illegal by illegal means, such an agreement is designated a criminal conspiracy:

PROVIDED that no agreement except an agreement to commit an offence shall amount to a

criminal conspiracy unless some act besides the agreement is done by one or more parties to such

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agreement in pursuance thereof. Explanation: It is immaterial whether the illegal act is the

ultimate object of such agreement, or is merely incidental to that object.

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RELATED CASES:

Case name Issue Bench Remarks

OttavioQuoattrocchiv.

Central Bureau of

Investigation [75

(1998) DLT 97 (DB)]

Establishing

corruption by public

servants under

Section 5(2) read

with Section 5(1)(d)

of the Prevention of

Corruption Act,

1947. In the Bofors

scandal, several

ministers including

the Prime Minister

Rajiv Gandhi were

accused of receiving

kickbacks from

Bofors AB for

winning a bid to

supply India’s 155

mm field howitzer.

N Nanda, D

Gupta

It is stated that public servants

concerned are guilty of offences

coming under Section 5(2) read

with Section 5(1)(d) of the

Prevention of Corruption Act,

1947 as well Along with may

offences, which are still under

investigation. Prima facie an

offence under Section 120B

read with Section 420, I.P.C. is

made out on the facts brought

out from the material gathered.

Agreement dated 15,11.1985,

which is a secret agreement,

contrary to the clear

understanding, which emerged

at the meeting of the defense

Secretary with the President of

AB Bofors. In fact the

agreement dated 15.11.1985 is

an agreement to commit the

offence of cheating because the

two parties to the agreement

conspired to deceive the

Government of India and

dishonestly induced it to part

with money, which included the

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element of commission,

contrary to the understanding

and undertaking. The fact that

the commission of 3% of the

first Installment was paid would

mean that the petitioner had

kept his part of the agreement to

negotiate the deal and to support

the bid of AB Bofors, from

which it would further follow

that the petitioner had been able

to successfully negotiate with

the then Prime Minister and

defense Minister and other

public servants concerned to

obtain the contract for his

principal and the public servants

had in turn, in abuse of their

position, conferred pecuniary

benefits on the petitioner, which

acts would constitute offences

under the Prevention of

Corruption Act and the Indian

Penal Code.

Hindustan

Aeronautics Limited

v. Rolls Royce

[2015CriLJ2112]

The appellant is a

non-resident foreign

company for the

purpose of its tax

assessment in India.

The appellant was

not filing any return

On examination of the facts and

circumstances of the case, the

AO was of the view that the

appellant was having a business

connection in India Under

Section 9 of the Act as well as

permanent establishment under

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of income in India.

It was found by the

AO that the

appellant was

supplying aero-

engines and spare

parts of Indian

Customers, mainly

to M/s. Hindustan

Aeronautics Limited

(HAL), Indian Navy

and Indian Air force.

article 5 of the Double Taxation

Avoidance Agreement (in short

'DTAA') between India and UK.

The business connection and

permanent establishment were

found to be in existence in India

in the form of a UK

incorporated subsidiary

company of the appellant in the

name of M/s Rolls Royce India

Limited which was having its

offices in India. It was found by

the AO that the marketing and

sale of goods to Indian

customers were carried out by

the appellant through the said

permanent establishment

situated in India. As the

appellant was found to have

carried out its business activities

through the permanent

establishment situated in India,

the AO was further of the view

that the profits attributable to

the permanent establishment

was liable to tax in India in

terms of article 7 of the DTAA.

Union of India v.

Prakash

Hinduja&Anr.

[2003(6)SCC195]

Code of Criminal

Procedure 1973-

Sections 482, 173,

190, 156 and 157-

RajendraBabu

and

G.P.Mathur

The facts which were revealed

and were brought to light

during the course of hearing

showed that the CBI had failed

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Offence

under Penal Code

and Prevention of

Corruption Act-CBI

filing charge sheet

without approval of

Central Vigilance

Commission (CVC)-

Cognizance of

offence by Special

Judge-High Court

holding that filing of

charge sheet

without approval of

CVC violative of

directions issued by

Supreme Court in

VineetNarain `s case

empowering CVC to

have

superintendence

over the

working of CBI,

therefore illegality

in investigation

to perform its statutory duty and

legal obligation of investigating

offences and after completing

the investigation taking it to its

logical conclusion of launching

prosecution against all those

who were found to have

committed offences. The

direction issued never meant to

create or confer some kind of

additional rights in favour of the

accused as held by the High

Court. The accused has

absolutely no right to approach

the CVC for taking any steps to

stop the CBI from either

proceeding against him or from

launching prosecution against

him by filing a charge sheet.

Further, the directions issued do

not confer any kind of a right

upon the accused to assail the

charge sheet on the ground that

the CBI had not reported the

progress of investigation to the

CVC or had not taken some

kind of approval or concurrence

from it before submission of the

charge sheet in Court.

The Court also remarked that

The Resolution provided that

26 | P a g e

CVC shall have the power to

inquire or cause an inquiry or

investigation to be made on a

reference made by the Central

Government wherein it is

alleged that a public servant

above a particular level has

committed an offence under the

Prevention of Corruption Act

and to review the progress of

applications pending with the

competent authorities for

sanction of prosecution under

the aforesaid Act.

GautamKhaitanv.

Union of India [Delhi

High Court, W.P.(C)

8970/2014]

In 1999, the Indian

Air Force (I.A.F.)

had proposed to the

Government of India

(G.O.I), Ministry of

Defence (M.O.D) to

replace the existing

MI-8 VIP

helicopters, on

ACCOUNT of

operational

difficulties faced by

the organization on

the basis of which in

October, 2000, a

procurement process

was initiated.

Rajiv

Shakdher

The judge arrived at the

conclusion that having regard to

the material accompanying the

impugned order and the

discussion therein, the

designated / authorised officer

had reason to believe that the

properties in issue were

involved in money-laundering,

and that, if they were not

attached, immediately, it could

lead to the proceedings under

the PMLA, being frustrated.

As indicated above, this could

only be a tentative view based

on the material presently

available with the designated /

27 | P a g e

Accordingly, a

REQUEST FOR

PROPOSAL was

issued to eleven

global vendors. Out

of the eleven (11),

four (4) vendors

responded. The

RFP, amongst

others, contained a

mandatory condition

with regard to

'service ceiling'.

Service ceiling is the

technical term for

the altitude, at which

a helicopter can fly.

The RFP, provided

for a service ceiling

of 6000 metres. This

requirement was

relaxed, which led to

the service ceiling

being reduced to

4500 metres.

The reduction in the

service ceiling

enabled Augusta

Westland to enter

the fray. Eventually,

Augusta Westland,

authorised officer. The

petitioners would have a full

opportunity to present their

version of events and

demonstrate with the help of

material and evidence in their

possession, that the properties

which stand provisionally

attached, are not, involved in

money-laundering. Therefore,

the submission made on behalf

of the petitioners that there was

no material available for

existence of such a belief, is in

my view, untenable. And

therefore the judge found no

merit in the writ petition filed

by the Petitioner.

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won a contract for

supply of 12 AW-

101, VVIP

helicopters.

Manager, Stores and

Purchases v.

Collector of

Customs[1992 (40)

ECR 481 Tri Delhi]

The appellant,

Indian Airlines

entered into a

purchase agreement

with the prior

approval of the

Government of India

for acquisition of 19

A-320 Airbus

Aircraft from the

Airbus Industries,

France. The

purchase agreement

referred to above

inter alia provided

that the seller will

grant to the buyer a

credit memorandum

of US $ 2 million

for each of the

firmly purchased A-

320 Aircraft No. 1

to 19 and that this

credit memorandum

will be made

available at each

concerned aircraft

V.T.K.S.

Maruthi

When there is evidence to show

that contractually between the

admittedly unrelated buyer and

seller the actual price paid or

payable is the price fixed as per

purchase agreement as reduced

in terms of letters agreement

which are parts of the purchase

agreement, and once it is shown

that such reduction in price is

simultaneous with raising of

invoice and delivery of the

aircrafts, there is sufficient

ground and it will be reasonable

to accept this reduced price as

the transaction value under Rule

4 of the Customs Valuation

Rules, 1988 being the value of

the imported goods actually paid

or payable. It may also be

observed that in such a

circumstances as in the present

case the fact that such

deductions are not shown in the

invoice may not be material as

long as it is established by

evidence that the actual price

29 | P a g e

delivery to reduce

the final contract

price.

paid or payable is the one which

is as per purchase agreement as

reduced by amount of credit in

terms of the letters agreement

which form part of it. It is also

evident from the records that the

availability of this price

reduction was something known

to both the parties at the time of

contract. Therefore, it is not

something indeterminate. This

is also a pointer that such

reduction in value has to be

treated as permissible. In the

result, having regard to the

totality of the evidence on

record relating to the

transaction, there is sufficient

ground to hold that the value as

declared by the appellants for

the aircraft in the Bill of Entry

taking into consideration the

reduction envisaged in the

letters agreement can be

accepted as transaction value for

the purposes of assessment of

the goods to duty in terms of the

Section 14(1) of the Customs

Act, 1962 read with Rule 4 of

Customs Valuation Rules, 1988

being the transaction value of

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the imported goods. In this view

of the matter, the appeal is

allowed.

Suresh Nanda v.

CBIFIR No. RC-1C1

2006-A0004; FIR No.

RC-1(A)/2006- ACU-

(V)

The first FIR

concerned the

payment of

kickbacks in the

matter of

procurement of

Barak-I Anti

MissileDefence

systems and 200

missiles for the

Indian Navy. The

second was which

concerned the

payment of

kickbacks for the

supply of 87

Armoured Recovery

Vehicles to the

Ministry of Defence

during 1989-99.

Both FIRs are for

offences under the

Prevention of

Corruption Act

1988. The allegation

against the petitioner

was that he acted as

a middle man in the

Investigations in this case were

extended to Germany,

Mauritius, the UK, Israel and

the UAE, for which letters

rogatory were issued.

Consequent to the investigation,

closure report was filed in the

Trial Court.

The status report gave details of

the CBI's investigations into

aluminium casket purchase case.

Its chargesheet filed before the

trial court on August 13, 2009

detailed how Army officers

cheated the exchequer of Rs

89.76 lakh by purchasing

caskets and body bags from US-

based non-manufacturing

vendors Buitron and Baiza. The

trial court on December 2013

discharged all Army officials

but the trial against US citizen

Victor Baiza is still pending.

31 | P a g e

said transactions. In

the first FIR, the

named accused

include the then

Defence Minister

Mr. George

Fernandes, the then

Naval Chief

Admiral Mr. Sushil

Kumar and the

petitioner. In the

second FIR, the

public servants

involved are stated

to be unknown. It is

stated that after

registering the two

FIRs various

premises suspected

to be associated with

the Petitioner were

searched on 10th

October 2006.

Gopalaswamiv. Union

of India [WP(C)

4653/2013]

The petitioner

challenged the

procedure for

appointment of the

Comptroller and

Auditor General(

CAG) on the

grounds that the

BadarDurrez

Ahmed

In the case before us, there is no

pending disciplinary

proceedingnor any pending

criminal case insofar as the

respondent No. 2 herein is

concerned. In judicial review, as

pointed out in the CVC case, we

are concerned not about the

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CAG was involved

in defence

procurements in his

capacity as the

Director General of

DefenceAcquisitions

and as the audits

conducted by the

CAG involve a large

part of defence

purchases that he

was a stakeholder in.

Furthermore, the

petitioner alleged

that the appointment

process was

arbitrary and

therefore the

institutional

integrity therein was

questionable.

merit but about the legality of

the appointment. What the

petitioners want us to do is to

examine the merit of the

appointment of the respondent

No. 2 as the CAG. That would

amount to a merit review which

is entirely distinct and different

from judicial review. There is

no doubt that the CAG is an

integrity institution, but that by

itself, would not entitle us to

conduct a merit review in the

guise of a judicial review.

Case study of other defense and aerospace procurement scams

1. Bofors scandal (Referred in the case of OttavioQuoattrocchiv. CBI)-It was a major corruption

scandal in India in the 1980s and 1990s, initiated by Congress politicians and implicating the

prime minister, Rajiv Gandhi and several others who were accused of receiving kickbacks from

Bofors AB for winning a bid to supply India’s 155 mm field howitzer.3

3The Wall Street Journal, 27 February 2013, “India Parliament Panel to Probe Helicopter Deal”, http://online.wsj.com/article/SB10001424127887324662404578330162252293952.html.

33 | P a g e

2. Antrix-Devas multimedia scam- In 2011, the former ISRO chairman and three other

scientists were involved in a controversial deal between the Indian Space Research

Organisation’scommercial arm Antrix Corporation and Devas Multimedia. The deal involved

ISRO leasing the S-band transponders on two satellites (GSAT6 and GSAT6A) to Devas for

broadcasting purposes. A CAG report found that the department of space hid facts from the

Cabinet. The arbitration aspect of this dispute was adjudicated by e single-judge Bench

comprising Hon’ble Chief Justice AltamasKabir in 2013. [Arbitration Petition No. 20 of 2011]

3. Agusta Westland scam: An Italian court sentenced the former head of AgustaWestland to

two years for false bookkeeping, but cleared him of a more serious charge of international

corruption related to a 560 million euros deal to sell helicopters to India.Giuseppe Orsi had been

accused by an Italian prosecutor of overseeing the payment of bribes to the former head of the

Indian Air Force to secure the purchase by India of 12 AW101 helicopters in 2010. Following

Orsi’s arrest, the helicopter contract was cancelled and India was able to claim 228 million euros

held as bank guarantees on the deal.In August India reportedly banned Finmeccanica from

bidding for new contracts in India and has its own investigation under way into the alleged

bribery.4

Former AgustaWestland executive Bruno Spagnolini, who was also on trial, also received two

years for false bookkeeping but was acquitted on the corruption charge.

3. Denel scam- The Denel group had been blacklisted by the previous Indian government

following allegations that it had paid kickbacks amounting to US$3.9 million between 1999 and

2005 to win a contract for 1 000 NTW-20 anti-material rifles (plus 398 000 rounds of

ammunition) for the Indian Army via the British company Varas associates. The ban was

imposed in 2005, by which time 400 of the rifles had been delivered. The CBI also launched a

probe into the matter but the investigations were terminated last year owing to the lack of

substantial evidence. In August 2015, the Ministry of Defense lifted the ban on trade with

Denel.5

4Reuters, 19 June 2013, Emilio Parodi, “Finmeccanica helicopter corruption trial starts in Italy”, http://in.reuters.com/article/2013/06/19/finmeccanica-trial-start-idINDEE95I0AS20130619. 5IOL News, 22 April 2005, “India order probe into Denel contracts”, www.iol.co.za/news/south-africa/india-ordersprobe-into-denel-contracts-1.239420#.UXFJCLX-HLc.

34 | P a g e

4. Bharat Earth Movers Ltd in collaboration with Tatra Vectra Motors had produced over

7000 trucks to the Army. When General VK Singh took over as the Army Chief, he refused to

authorize the purchase of trucks after he was offered a bribe. The scam was estimated at Rs 750

crore6 [This issue was discussed in light of the blacklisting of Global Vectra without any show

cause notice, hearing or reason before Justice VipinSanghi of the Delhi High Court in Global

Vectra Helicorpv. Directorate General of Civil Aviation W.P.(C) 2775/2012].

5. 1987 HDW commissions: The German submarine maker was blacklisted after allegations that

commissions worth Rs 420 crore had been paid in the 1987 deal in India.

6. 1948 Jeep scandal: It was first major corruption case in independent India. VK Krishna

Menon, the then Indian high commissioner to Britain, ignored protocols and signed a contract

worth Rs 80 lakh for the purchase of army jeeps with a foreign firm.While most of the money

was paid as lump-sum, merely just 155 jeeps landed and the then Prime Minister Nehru forced

the government to accept them. Former Home Minister GovindBallabh Pant announced on

September 30, 1955 that the Jeep scandal case was closed for judicial inquiry ignoring the

suggestions proposed by the Inquiry Committee led by AnanthsayanamAyyangar.

8. Scorpene deal scam- It was alleged that the French military hardware company Thales paid

Rs. 500 crore (about USD 10 mn) to the Indian government as part of the Rs.19,000 crore

submarine deal that was approved by Defense Minister Pranab Mukherjee in October 2005. The

amount was channeled via middlemen such as Abhishek Verma. Also involved was Ravi

Shankaran, a relative of the then chief of navy staff Arun Prakash. He is the prime accused in the

Navy War Room spy scandal.

The CBI has closed most of the FIR’s filed on account of defense scams. The only case pending

investigation relates to purchase of armoured recovery vehicles from Unimpex, Slovakia. The

CBI had registered an FIR in 2006 against R K Jain and Suresh Nanda and told the Supreme

Court that it had sent letters rogatory to Slovakia and Czech Republic.

TRANSNATIONAL CASE STUDIES

6Indian Express, 23 October 2012, “CBI makes Antony statement in the house as part of evidence in Tatra bribe offer case”, www.indianexpress.com/news/cbi-makes-antony-statement-in-house-part-of-evidence-in-tatra-bribe-offercase/1020611/

35 | P a g e

1. Al-Yamamah controversy- BAE Systems (formerly known as British Aerospace) was

accused of paying bribes to the Saudi Royal Family to secure deals for supply of fighter jets to

Saudi Arabia. The Al Yamamah agreement committed the United Kingdom government to

develop and support the fighter jet program of the Saudi government. Two memorandum of

understanding (MOU) were signed in the 1980s, and another MOU was signed in December

2005 by the two governments to replace the Tornado aircraft with 72 Eurofighter Typhoon

fighter jets.In May 2004, it was alleged that over GBP 60 million had been paid to the Saudi

Royal family (including to son of the then Saudi defense minister) by BAE systems. This expose

caused the Serious Fraud Office (SFO) to initiate an enquiry into the whole affair which

revealed that bribes had been paid to the Saudi Royal family including- gifting of a Rolls-Royce,

a GBP 200,000 wedding gift to one of the Princesses, a fully paid ski vacation for a Prince and

his friends. As the SFO’s investigation continued, in December 2006 the Saudi government

reportedly issued an ultimatum giving the UK “10 days to halt a fraud investigation into the

country's arms trade - or lose a £10 billion Eurofighter contract”. In March 2010, BAE Systems

pleaded guilty to conspiring to defraud the United States by impairing and impeding its lawful

functions, to make false statements about its Foreign Corrupt Practices Act compliance program,

and to violate the Arms Export Control Act and International Traffic in Arms Regulations. It was

given a $400 million fine and agreed to take measures in order to stay within US and foreign

laws concerning corruption and the exports of arms. The company also agreed to retain an

independent compliance monitor for three years to assess its compliance program and to make a

series of reports to the company and the Department of Justice.7

2. The Lafayette scandal- Refers to the allegations that over $760 million in bribes were paid to

French, Chinese, and Taiwanese officials for the 1992 sale of six Lafayette French frigates to

Taiwan. During the war, Taiwan had entered into an agreement with France, which originally

stipulated a certain degree of technology transfer for assembling the ships in Taiwan, and the unit

price was set at US$358 million the final contract however was for ships to be built fully in

France at ahigher unit price of US$474 million. The final price tag for the six ships was an

exorbitant US$2.8 billion. However, these inflated charges were not questioned at that time. The

matter was subjected to public scrutiny after the mysterious death of Captain Yin Ching-Feng.

7Jarrett, Tim, and Claire Taylor. 2010. Bribery allegations and BAE Systems. London: UK House of Commons.

36 | P a g e

The ensuing investigation revealed that the amount of bribes that were actually paid ranged from

US$500 million to US$760 million. Testimonies indicated that between US$114 and US$400

million was owed back to Taiwan and was split among senior officials, while a small proportion

went, probably, to Chinese advisers in the mainland.8

RECOMMENDATIONS

The composition of the UD may be altered to include technical experts. There must be a

constant review of the capabilities of the Indian Army, Naval Force and Air Force by a

technical committee. Each service will then draft an SQR which is sent to the UD; which

then issues the RFI.

All governmental and non-governmental participants in the procurement process must

disclose all private stock-holdings in relation to the vendors to ensure minimum conflict of

interest. Further, Judicial Review must be enhanced in cases pertaining to a conflict of

interest to ensure greater accountability.

The new DPP (slated to be released in 2015) proposes to increase offset requirement to 40%

and 60% in Buy (Global) and Buy and Make (Global) respectively. Increasing offset

requirement is accompanied with the risk of deterring the foreign vendors from making

capital investments which will be counter-productive to our short term goal of defense

preparedness. For defense capacity building, it is recommended that the categories of

investments through offsets be clearly demarcated and offsets be encouraged in technology

transfer.

A transnational crime frame, it is recommended, would helpresolve the problems of

identification and attribution by ensuring information obtained from bribe- givers is promptly

shared and also by ensuring that the legal structures across countries are better synchronized

to share evidence necessary to secure convictions.

8Sung, Hung-en. 2009. Transnational Corruption in Weapons Procurement in East Asia: A Case Analysis. Case Study, New York: John Jay College of Criminal Justice.