‘Nothing to see here’ says Australia as third Thales corruption case starts globally
Defence Industry Minister Pat Conroy turns a blind eye to “unethical conduct” between Thales and the Defence Department despite national audit office warning of "capture" by weapons giants
Part 3 of 3 (read part 1 and part 2)
The number of corruption investigations into the Thales Group continues to mount internationally with another announced two weeks ago.
The UK’s Serious Fraud Office and its French equivalent, Parquet National Financier, are jointly investigating suspected bribery and corruption by Thales on a contract in Asia. Thales has denied the allegations.
This followed news in June that police in France, the Netherlands and Spain had raided Thales’ offices in those countries as part of two separate additional corruption investigations into arms deals involving the Thales Group, as we reported in part 2.
In Australia, however, the Albanese government has swept aside a key integrity agency’s reports of “unethical conduct” between Thales and the Defence Department, appointing Thales as the fourth “strategic partner” in the new domestic missile-making enterprise.
Minister for Defence Industry Pat Conroy dismissed as an “unsubstantiated allegation” that was “flying around” the documented concerns of the Australian National Audit Office about a former defence official sharing confidential information with Thales and later soliciting a bottle of champagne from the company.
In a televised address at the National Press Club on October 30, where Conroy announced the government’s appointment of Thales as a Guided Weapons and Explosive Ordnance (GWEO) “Strategic Partner”, the minister was asked whether he remained confident in Thales and its integrity.
Said Conroy: “Let’s be very frank about this thing that’s flying around. There’s an allegation of an incident that occurred in 2017. 2017 – seven years ago – under the last government.
“Defence has thoroughly investigated it and I’m advised that’s there’s been no evidence to substantiate the allegation. It’s important to note that there is one allegation, unsubstantiated.”
But Conroy was wrong to claim the Thales deal has been “thoroughly investigated”, said Chris Douglas, a Perth-based international financial crime consultant.
“It has not been. The Defence Department does not have the capability to investigate allegations that could involve corruption.”
Douglas said that a thorough investigation could only be undertaken by a law enforcement agency, particularly the National Anti-Corruption Commission, “using a full suite of investigation powers including electronic evidence gathering”.
“There might be evidence at the person’s home, Defence isn’t going to find that, or in premises occupied by Thales, Defence won’t find that either. That is why we have a NACC.”
Following the audit office’s scathing June report on the 2020 Thales munitions deal, the Defence Department referred the matter to the NACC.
According to the ABC, after receiving the referral the NACC instructed the Defence Department to conduct the preliminary investigation. The department later said it was unable to substantiate the allegation. (See part 1.)
Douglas said the NACC did not appear to have placed sufficient weight on the seriousness of the matter, particularly as Thales is linked to several international corruption matters, operates in one of the most corrupt industries in the world, and currently manages Australian Government contracts worth billions of dollars.
He added that if Thales was an individual, “based on its past behaviour it would not be given a security clearance, and therefore no employment”.
Following the ABC’s report, Minister Conroy was asked whether he was concerned that the investigation into the unethical conduct appeared “to have hit a dead‑end, with the Anti‑Corruption Commission referring it back to the department, which then found no evidence”.
Conroy responded: “I think the important thing there is all due process was followed… All the organisations involved have investigated this matter.”
GWEO Chief, Air Marshal Leon Phillips, added: “The department has investigated that matter and cannot substantiate what was alleged. So we’ve concluded those matters.”
It is a long way from Defence Minister Richard Marles’ promise on 30 June that the matter would be “fully investigated” in a way which is “completely robust, which people have total confidence in”.
Champagne bottle “least of the concerns” about Defence probity
At a hearing of the parliament’s powerful Joint Committee on Public Accounts and Audit in November, Senator Linda Reynolds, deputy chair of the committee and a former defence minister, raised strong concerns about the 2020 Thales munitions deal.
Reynolds alluded to discrepancies between what she had been told as minister in briefings by the Defence Department and the facts contained in the report.
“When I read this audit report and remembered what had actually come up to me in the [ministerial] brief, it almost made me feel ill … and that is very consistent with the advice that is in this report that went to a different minister in 2017.”
Reynolds’ remarks corroborated the auditor-general’s report: “Defence’s advice to ministers on the tender and contract negotiations did not inform them of the extent of tender non-compliance [by Thales], [the] basis of the decision to proceed to negotiations, or [the] ‘very high risk’ nature of the negotiation schedule.” (p9)
The report also said the department’s advice in mid-2017 to then minister for defence industry Christopher Pyne was incomplete regarding the Department’s decision to proceed with Thales as sole tenderer: “The advice did not address the legal basis for the procurement method, the risks associated with a sole source procurement approach, or value for money issues — including how Defence expected to achieve value for money and maintain commercial leverage in the context of a sole source procurement.” (p10)
We’ve had a history of ANAO reports and [Defence Department] mea culpas… It’s like groundhog day
Reynolds told defence officials at the hearing: “These are not the first appalling findings by the ANAO… We’ve had a history of ANAO reports and [Defence Department] mea culpas… It’s like groundhog day… I think the bottle of champagne was the least of the concerns in relation to probity.”
She said the fact that the government was continuing to award new contracts to Thales was a concern: “You’ve inherited a smell, a big smell.”
Defence appointed a lead negotiator that was providing training to Thales at the same time
In a repeat of the future frigate contract negotiation with BAE Systems (see our Sinking Billions series), the audit report revealed (p87) that the Defence Department hired an external negotiator with a conflict of interest to lead its billion-dollar negotiations with Thales.
In October 2019 Defence hired Scotwork Australia as its lead negotiator on the munitions factory contract.
In mid-September 2019, following a request from Defence, “Scotwork Australia provided a quotation recommending that training be delivered to both Defence and Thales by the contracted lead negotiators for Defence”.
The quote noted that the two lead negotiators being hired by Defence had delivered dozens of negotiation skills courses to Defence and Thales over the years.
The joint negotiation training was provided by Scotwork to both the Thales and the Commonwealth negotiation teams at the same time and location, with no segregation. It was fully paid for by Defence.
Furthermore, in November 2019, Defence was advised by one of its lead negotiators that Thales had engaged Scotwork to deliver a negotiation course (separate to the above training). Defence’s two lead negotiators together owned 55% of Scotwork, and would benefit financially. They said they were not involved with that Thales training, that Scotwork had strict ethical walls in place, and that the revenue was “not material”. Defence accepted this and did not enquire into the dollar value of the revenue.
Defence conducted its contract negotiations with Thales from 5 December 2019 to 19 February 2020.
These are just a few of the many serious issues documented in the audit report.
“Strategic partners” or state capture?
Thales Australia’s CEO, Jeff Connolly, said the announcement of its appointment as Guided Weapons and Explosive Ordnance “Strategic Partner” was “proof of the enduring trust between Thales Australia and the Commonwealth”.
In her evidence to the audit committee, deputy auditor-general Rona Mellor was forthright about the use of such language by government and industry: “One of the big issues is this…nomenclature of ‘strategic partnership’. You’re actually not in partnership. You have a contract… you need to hold them to account.”
One of the big issues is this…nomenclature of ‘strategic partnership’.
You’re actually not in partnership.
You have a contract… you need to hold them to account.
On the Thales deal, Mellor told the committee that while big international weapons contractors did “important heavy lifting in defence specialist military equipment and munitions”, keeping an “appropriate distance in our relationships” was important.
She said the audit office had “ongoing concern” about the implementation of the recommendations it issued to Defence, particularly for long-term contracts involving “strategic partners”.
The current report focused on the munitions group, “but next week we’ll go into the shipbuilding group and we’ll see the same thing, or the week after we’ll go into the Air Force and see the same thing”, Mellor said.
“There’s a really big challenge ahead for Defence. The biggest challenge, [as] this one shows, is that there is a culture in these very long-term contracts… There’s a real risk that you get captured by the provider, whether it’s in incumbency in turning contracts over, or in the nature of relationships that you form.”
There is a culture in these very long-term contracts…
there’s a real risk that you get captured by the provider
Thales Australia has managed the Mulwala and Benalla munitions factories for the Commonwealth since the late 1990s. The company has consistently ranked in the Defence Department’s top three contractors, earning more than $1 billion a year from taxpayers. It has $7 billion in current contracts with the department, Austender shows.
Senator Reynolds was defence minister for the final year of the more than decade-long procurement process for the management of the munitions factories. She was the last of seven ministers to oversee the process, which began in 2009. Reynolds became defence minister in May 2019. She approved the deal, along with then finance minister Mathias Cormann, in May 2020. The now $1.4 billion contract expires in 2030.