The Israeli police are investigating allegations of corruption in relation to a contract for ThyssenKrupp to build a fleet of corvettes and submarines for the Israel Defense Forces or IDF.
The allegations couldn't have surfaced at a worse possible time for ThyssenKrupp, or for Germany's shipbuilding industry.
ThyssenKrupp's shipyards in the north German port city of Kiel are fully set up to start work on the newest submarine for Israel's navy. The vessel, to be named Dakar, is supposed to be delivered in two years. But it's looking less and less likely that delivery will be on time. A squabble over costs has already delayed the Dakar.
But Handelsblatt sources said that it looks increasingly likely that the contracts for another three extra submarines that were due to be built after Dakar will also be canceled amid allegations of corruption. That would mean that the Dakar would be the last Israeli naval vessel to roll off a Kiel slipway for the foreseeable future. That could be the death blow to the shipyards, which recently missed out on a large contract to build submarines for Australia.
Dakar has been delayed because Israel wants to build in extra weapons systems, which can only be done by changing the dimensions of the submarine, and ThyssenKrupp and the Israeli military are at loggerheads over who should pay for the changes, sources told Handelsblatt.
If Mr. Barkat continues to represent the German shipyard, no more submarines will be ordered. Eliezer Marom (attributed), Former Israeli navy chief
But more worrying are the allegations of corruption. Two weeks ago the Israeli TV network Channel 10 reported on the connection between ThyssenKrupp's adviser Miki Ganor and Israeli Prime Minister Benjamin Netanyahu.
The connecting link between the two men is David Shimron, Prime Minister Netanyahu's cousin and personal lawyer. He has no official post in the government, but is a close adviser to the prime minister. According to Israeli media, he has a powerful position pulling strings from behind the scenes, from where he has influenced appointments to important positions.
Mr. Ganor has also engaged David Shimron as his lawyer, to represent ThyssenKrupp in the renegotiation of the submarine contracts. He is suspected of possibly having influenced the Israel defense ministry's decisions on important weapons contracts – particularly in relation to the acquisition of three further submarines. They're expected to cost around €2 billion ($2.1 billion).
The German government will shoulder about a third of the costs, due to their post World War II legal obligations towards Israel, and the fact that German taxpayer funds are involved means all sides have to look into allegations of corruption very carefully.
The three new submarines were meant to be delivered after the Dakar, over the coming decade, to replace older subs.
The Israeli defense ministry had planned to open the project up to international tender. Although ThyssenKrupp has long been a preferred ordnance provider to the Israelis, they would have had to face competition from France and other countries.
Channel 10 reported that an email from a defense ministry official shows that Mr. Shimron intervened on ThyssenKrupp's behalf.
According to the report, Mr. Shimron talked to the ministry's legal adviser, attorney Ahaz Ben-Ari, and asked him to act on behalf of the German company. Mr. Ben-Ari then spoke of the conversation with Mr. Shimron in an email to the the IDF's director general, Dan Harel in July 2014.
The email said that David Shimron wanted to know if the Israel Defense Forces were halting the bidding process in order to negotiate with his client, saying that the prime minister had requested this.
The IDF has declined to comment. Mr. Shimron has rejected this version of events. He confirmed to the Handelsblatt that he had a conversation with the head of the IDF's legal department, saying it had been very brief, and had centered on the tender process for a naval craft.
“I did this on behalf of Mr. Ganor, and not on behalf of ThyssenKrupp,” he said.
Israel had already commissioned four new naval corvettes, awarding the contracts to ThyssenKrupp. Sources involved in the process told the Handelsblatt that, at the time, the IDF had considered opening it up to international tender. One insider says this would not have been helpful, because the ministry had the idea that awarding the contract to a South Korean or French firm would have been cheaper.
At ThyssenKrupp, Mr. Shimron's statement is likely to cause disquiet. Until now he had presented himself merely as Mr. Ganor's legal adviser. Obviously he's also become involved in the business side of things, otherwise why would he have spoken to the IDF's lawyers? This actually contravenes the terms of the consultancy agreement between ThyssenKrupp and Mr. Ganor, under which the engagement of a subcontractor must first be approved by the company. A company spokesman said that has not happened.
Two contracts have fallen under suspicion of irregularities – firstly the purchase of the corvettes for about half a billion euros, and secondly the planned commissioning of three additional submarines.
Mr. Netanyahu apparently pushed through the deal on the extra submarines, against the will of the defense ministry. Israeli media see this as an indication of corruption, because ThyssenKrupp, through Mr. Ganor and his lawyer, could have exerted pressure on the prime minister. Mr. Ganor and Mr. Netanyahu strongly reject the accusation. ThyssenKrupp's compliance officer, Donatus Kaufmann, said the company will begin an intensive probe into the allegations.
Regardless of whether the business is the result of hard lobbying or some form of corruption, new problems are emerging almost every day. The circumstances by which Mr. Ganor became ThyssenKrupp's adviser in Israel are, to say the least, unusual.
Since the 1990s, Shaike Barkat was the Kiel shipyard's representative in Israel, a military veteran of the Six-Day War and highly regarded – but not by everyone.
In the report on Israel's Channel 10, Mr. Barkat said that in 2009, Eliezer Marom, Israel’s navy chief at the time, visited the shipyards in Kiel for a meeting with a shipyard director.
Mr. Marom apparently asked why Mr. Barkat was there and then refused to go into the meeting if Mr. Barkat was going to be present.
Commander Marom then told the Germans that if “Mr. Barkat continued to represent the German shipyard, no more submarines would be ordered.”
Employees of the Kiel shipyards confirmed Mr. Barkat's account.
“What could we do, if we wanted to make the deal?” one manager asked. Mr. Barkat was replaced by Mr. Ganor.
The latter also benefited personally from the switch. Handelsblatt sources say that for the submarine currently under construction, Mr. Ganor received a healthy sales commission when the contract was signed in 2009 – he's reported to have received around €11 million ($11.7 million) for his services. The bulk of that was for the corvette contract. ThyssenKrupp is now trying to establish whether the transactions were above board. The investigators will probably never discover in whose pockets the money ended up.
The Israeli police have opened a criminal investigation. After some hesitation, Israel's attorney general has ordered an investigation. Getting to the bottom of the allegations is likely to take some time.
Martin Murphy covers the steel, car and defense industries for Handelsblatt. Pierre Heumann is based in Israel since 1993 and covers the Middle East for Handelsblatt. To contact the authors: [email protected] and [email protected]