Weapons Money Intended For Economic Development Being Secretly Diverted to Lobbying
August 26, 2017
Alex Emmons / The Intercept
According to emails obtained by The Intercept, the United Arab Emirates has created a "slush fund" using money meant for domestic economic development projects and funneled it to a high-profile think tank in the US. When a country buys weapons from a firm overseas, it pumps a large amount of money out of its economy, instead of investing in its own defense industry or in other domestic projects. So to make large weapons deals more attractive, arms companies offer programs to "offset" that effect.
Weapons Money Intended For Economic Development
Being Secretly Diverted to Lobbying
Alex Emmons / The Intercept
(August 17 2017) -- The United Arab Emirates created a "slush fund" using money meant for domestic economic development projects and funneled it to a high-profile think tank in the United States, emails obtained by The Intercept show.
Last week, The Intercept reported that the UAE gave a $20 million grant to the Middle East Institute, flooding a well-regarded D.C. think tank with a monetary grant larger than its annual budget. According to an email from Richard Clarke, MEI's chairman of the board, the UAE got the money from offset investments -- development investments by international companies that are made as part of trade agreements.
The idea behind offset agreements is simple: When a country buys weapons from a firm overseas, it pumps a large amount of money out of its economy, instead of investing in its own defense industry or in other domestic projects. So to make large weapons deals more attractive, arms companies offer programs to "offset" that effect. As part of a weapons package, they often sign an agreement to invest in the country's economy, either in defense or civilian sectors.
Offsets provide a way to sell weapons at inflated prices, when companies offer juicier offset packages. Critics say the lack of transparency in how offset investments are carried out leaves a window open for a form of legalized corruption. The emails lift a veil on what has long been an obscure element of the arms trade.
According to an email from Clarke, the UAE accepted unpaid offset obligations as cash payments to a large financial firm called Tawazun Holding. Tawazun sent the $20 million to a UAE think tank called the Emirates Center for Strategic Studies and Research. ECSSR then began sending that money to the Middle East Institute, a prestigious D.C. think tank that has a history of promoting arms sales to Gulf dictatorships.
"He said the funds would come from Tawazun, from a fund they had created into which companies owing offsets could donate cash in lieu of projects," wrote Clarke. "He stressed that he did not want us to contact the companies."
ECSSR and Tawazun did not respond to a request for comment from The Intercept.
So essentially, in a roundabout way, the UAE took money from international firms that was meant for economic development and funneled it to a supportive think tank in the United States.
The UAE practice of accepting offsets as cash payments is itself unusual, and referenced in a 2011 WikiLeaks cable from the US Embassy at Abu Dhabi. "There are also reports," the cable reads, "as well as anecdotal evidence, indicating that defense contractors can sometimes satisfy their offset obligations through an up-front, lump-sum payment directly to the UAE Offsets Group."
Neither MEI President Wendy Chamberlin nor Chairman Richard Clarke responded to a request for comment.
Multiple experts in the international arms trade interviewed by The Intercept expressed shock not only that the UAE accepts offset payments as cash, but that it funnels them to think tanks overseas.
"I've not heard of the practice of offsets being paid in cash before," said Sam Perlo-Freeman, head of the Stockholm International Peace Research Institute's project on military expenditure. "The actual benefit to the buying country is that it's a way of laundering money into a slush fund."
William Hartung, a widely renowned and published expert on the US arms industry, said in an email to The Intercept that the UAE's practice highlighted the vast potential for abuse in the offset practice.
"Offsets are a common practice in the global arms trade, and they are largely unregulated," said Hartung. "I'm less familiar with the idea of using cash payments, which seem at best a form of legalized bribery. And if the UAE is truly ploughing some of these funds back into lobbying efforts or funding of think tanks in the US, it seems particularly inappropriate -- an egregious case of foreign influence peddling, indirectly financed by US companies."
In one notorious example, South Africa was promised that offset investments would create 65,000 jobs in its economy as part of a 1999 arms deal to buy jets and naval vessels. Amid widespread accusations of corruption, the program only created 13,690 jobs -- and even that figure was based on estimates that came from the companies themselves.
Offsets are so rife for abuse that a World Trade Organization agreement bans them from being used as a selection criterion for trade contracts. But like many WTO rules, that ban doesn't apply to the arms industry.
The UAE is a major client of US weapons firms. According to SIPRI, between 2012 and 2016, the country was the second-largest recipient of weapons exports from the US, behind Saudi Arabia.
In 2000, in one of the UAE's single largest arms purchases ever, it bought 80 F-16 aircraft with advanced missile capabilities, for $8 billion.
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