Situation Report

The Sunday Times exclusive revelation on December 3 last year of alleged corruption in one of Sri Lanka's largest military deals, the procurement of four old but "life extended" MiG-27 fighter jets and overhaul to four others worth billions of rupees or millions of dollars from Ukraine has had its sequel.

As a direct result of this disclosure, the Government of Ukraine has ordered a probe into the deal, authoritative sources in that country's capital Kiev said yesterday. This is to ascertain why it was touted as "Government to Government" when in reality the deal was made through a third party - an unknown company named Bellimissa Holdings Ltd., which operated from a London address. They suspect this to be a ruse.

Concerns of the Ukrainian Government had arisen following The Sunday Times disclosures that funds for the sale of the MiG-27 fighter jets as well as overhaul to four others, had not gone directly to Ukraine. The source in Kiev said the Government there wants to make sure suspected shady deals do not damage the reputation of their defence industry, a main source of revenue for a country that was part of the former Soviet Union.

The MiG-27 procurement/overhaul Contract between the Sri Lanka Air Force and Ukrinmash, a subsidiary of the Ukrainian Government owned trading arm Ukrspetsexport, was signed in Moscow on July 26, 2006. In that, Bellimissa Holdings Ltd., is described as the "Designated Party" and were touted as the "financier" of the deal. The Contract (article 24) gave the address of the firm as second floor, 145 - 157 St. John Street, London EC1V4PY.

The Sunday Times has re-confirmed that there is neither any staff nor an office facility at this address. The company has been listed in the Contract only with a fax number - (00) 44 870 8362430. There is no response to messages sent there. The names of Directors, beneficial shareholders or the company profile are not available anywhere. A leading UK publishing house was forced to conclude the company is non-existent except "on paper" and is "operating secretly." This is because their detailed probe did not find a shred of evidence on the workings of the company.

Since the exclusive disclosure on December 3, last year, continued investigations by The Sunday Times have unearthed details that are more shocking. The Corporate Banking Division of the People's Bank has been effecting telegraphic transfers of funds in instalments. This is in accordance with the Contract. They have opened Documentary Credit (or LC) to the beneficiary (Bellimissa Holdings Ltd., at the London address) through JP Morgan Chase Bank NA. The latter in turn has advised Documentary Credit (DC) to the DBS Bank in Hong Kong, according to documents available with The Sunday Times.

Unlike most DC for capital equipment being differed for five years, the MiG deal is shorter. Questions are being asked whether it is restricted for two years to enable quick disbursement of commissions and minimize "discounting" costs to the unknown company. Questions are also being asked whether the Documentary Credit structure meant Bellimissa Holdings Ltd., though touted as the "financier," had in fact no finance to provide in real terms.

If nothing else at all is known about Bellimissa Holdings Ltd., the name of one individual transpired in the Sri Lanka Air Force-Ukrinmash Contract. That is the name of M.I. Kuldyrkaev (Pronounced Kul dir Kah Yev) who has signed as "Director, for and on behalf of Bellimissa Holdings Ltd." Other signatories to the Contract were Kulasena Thantrige, Counsellor/Head of Chancery, Embassy of Sri Lanka, Moscow (on behalf of Air Marshal W.D.R.M.J. Goonetileke, Commander of the Air Force) and D.A. Peregudov, Director, on behalf of Ukrinmash. In addition, Mr. Thantrige has also signed as the only witness to the Contract.

Now, The Sunday Times has learnt from the authoritative source in Kiev that Mr. Kuldyrkaev has been warned by the Ukrainian Government not to involve himself in any military deals on behalf of their state agencies. Subsequent efforts by Ukrainian authorities, the source said, to request him to return to Kiev to answer questions have failed so far. "He has gone into hiding after switching off his mobile phone," the source said. The Ukrainian national has been living in the UK with his family. To a few who knew him, he had been styling himself as the representative for Europe and Asia of a leading company," the source added.

How Bellimissa Holdings Ltd., and Mr. Kuldyrkaev came to be involved in the MiG deal, investigations by The Sunday Times reveal, leads to not only greater suspicion but also deepens the mystery about the multi-million dollar transaction. The offer from Ukrinmash to sell MiG-27 aircraft and to overhaul others in the Air Force inventory was first made in February, last year. This was when an Ukranian delegation was in Colombo.

The Sunday Times has seen a four-page letter written by D.A. Peregudov, the Ukranian official who signed the Air Force- Ukrinmash Contract in Moscow. This is on a letter-head which bore the names of both UKRSPETSEXPORT and Subsidiary Enterprise UKRINMASH, dated February 6, 2006 and addressed to the Ministry of Defence with copy to the Commander of the Air Force.

He refers to discussions at the Ministry of Defence as well as at the Air Force headquarters and confirms that his company, Ukrinmash, had supplied MiG-27 aircraft in the year 2000/2001. Then the letter, which is a written offer, explicitly "on a Government to Government basis" goes on to deal with different matters under various sub heads. They include freight, payment terms, overhaul, duration, currency etc. Under the sub head titled "FINANCIER," this is what Mr. Peregudov says: "This offer is made in conjunction with financier providing finances to the plants. The beneficiary of the above confirmed letter of credit will be the financier. We will inform you the name of the beneficiary company within 3 working days for signing the contract (sic) on behalf of Ukrinmash."

What did he mean by saying "we will inform you of the name of the beneficiary 3 working days for signing (sic) the Contract?" Did he give the Ministry of Defence in three days, (i.e. after writing the letter on February 6, 2006) the identity of the financier? If that was the position, then why did the Government not verify such information until the Contract was signed on July 26, 2006? On the other hand, if that sentence meant the beneficiary would be made known just three days before the signing of the Contract, it makes the case even worse. Some ambiguity makes the answers unclear. Evidently, the Ukranian Government is also unaware of the exact role of the third party and hence the probe.

It was Mr. Peregudov's written offer that led to the conclusion of the MiG procurement/overhaul Contract in Moscow. On July 7, 2006, the Ministry of Defence wrote to the Commander of the Sri Lanka Air Force, Air Marshal Roshan Goonetileke. The letter said:
"Authority is granted to purchase four (4) MiG-27M aircraft subsequent to completion of overhaul with four (4) R29B-300 engines and to entrust major overhaul of three (3) MiG-27M aircraft and one (1) unit of MiG-23 UB aircraft available in the SLAF fleet from and to M/s Ukrinmash, Ukraine as applicable under the Govt. to Govt. transaction at a total negotiated C&F cost of USD 14,676,000 ……..and to waive off the performance bond as requested by the supplier due to the fact that the offer is on G2G basis as approved by the Cabinet of Ministers on 01.03. 2006."

For the purchase of the four MiG-27 aircraft (US $ 9,848,000) MoD approval was granted for payment to be made in four instalments: (1) 25% upon acceptance in Ukraine via irrevocable Letter of Credit against bank guarantee. (2) 25% final acceptance in Sri Lanka via irrevocable Letter of Credit. (3) 25% payment to be made one (1) year after the final acceptance in Sri Lanka with LIBOR plus 1.5% via irrevocable Letter of Credit, and (4) 25% payment to be made two (2) years after the final acceptance in Sri Lanka with LIBOR plus 1.5% via irrevocable Letter of Credit.

For the overhaul of three MiG-27M and one MiG-23 UB aircraft (US $ 4,128,000), payment in four instalments was approved by the MoD as follows: (1) 25% payment upon acceptance in Ukraine via irrevocable LC. (2) 25% upon final acceptance in Sri Lanka via irrevocable LC. (3) 25% payment to be made one (1) year after the final acceptance in Sri Lanka with LIBOR plus 1.5% via irrevocable LC, and (4) 25% payment to be made two (2) years after the final acceptance in Sri Lanka with LIBOR plus 1.5% via irrevocable LC. A further sum of US $ 700,000 was to be incurred on freight.

The Sunday Times investigations reveal that the name of Bellimissa Holdings Ltd., and Mr. Kuldyrkaev surfaced for the first time only in the Contract signed in Moscow on July 26 last year. If the deal was negotiated direct and the Government resorted to the transparent practice of identifying a recognised financier instead of giving into the Ukrinmash request, a large amount of money could have been saved. After all, it was known that the MiG-27s, which were old and rejected once before, were earlier made available at much cheaper prices.

A brief summary of the revelations made by The Sunday Times on December 3, last year, places matters in context. Here are extracts:
"A contract between the Air Force (SLAF) on behalf of the Government of Sri Lanka and the Ukrainian Government owned firm Ukrinmash is touted as a Government to-Government deal. Such deals are made to obviate the need to call for tenders to pick the lowest bidder. The widely accepted principle in these deals, referred to, as G-to-G is the elimination of third parties or intermediaries who make fat commissions and become billionaires overnight.

"In this instance, the contract signed on July 26, this year, identifies an offshore company, Bellimissa Holdings Limited, registered in the United Kingdom, as the "Designated Party". The cost of the four MiG27s, freight and other charges will go direct to this company which the contract stipulates, "… shall be involved to provide finance needed in executing this project…."

"The contract has been signed just one day before July 27,2006 when Lanka Logistics and Technologies Limited, a wholly state owned limited liability company came into being to procure all equipment and services for the armed forces and the Police……….

"…..the MiG-27s in question were left over from a fleet from which the Air Force carefully selected and purchased seven units earlier. This was on two different occasions. That was six years ago and the prices were much lower. And now, they have been contracted for at higher prices. Documents obtained by The Sunday Times show that the first was on May 25, 2000 when four MiG-27 ground attack aircraft were purchased for US $ 1.75 million (or about Rs 189 million) each. They were manufactured between 1982 and 1985. The second purchase was on October 24, 2000. In this deal, two MiG-27s were purchased at US $ 1.6 million (about Rs 172.8 million) each. One was manufactured in 1981 and the other in 1984. A MiG-23 UB trainer was procured for US $ 900,000 (or about Rs. 97.2 million). This unit was manufactured in 1984.

"The Sunday Times investigations revealed that the purchase price for the latest deal, four MiG-27s, is US $ 2,462,000 (or Rs 265,896,000) each. The total cost without freight works out to US $ 9,848,000 (or Rs 1,063,584,000). This is for the ground attack aircraft manufactured between 1980 and 1983, in terms of the Contract.

"The Sunday Times is in the possession of documents to confirm that the Air Force concluded two previous deals for seven MiGs as pure commercial transactions. They were not classified as "Government to Government." These purchases were made by the Air Force from DS Alliance Private Limited, a Singapore-based firm which offered a finance package. The aircraft were delivered by "Lviv State Aircraft Repair Plant" which is a "State Enterprise" under the Ukranian Ministry of Defence. Like in the latest deal, the supply of the MiGs came then through Ukrinmash via D.S. Alliance Pvt. Ltd.

"The latest purchase of four MiG-27s (on July 26) involving Bellimissa Holdings as a third party is declared a "Government-to-Government deal". Documents in possession of The Sunday Times show that the aircraft purchased from Ukrinmash are also being delivered by the same Lviv State Aircraft Repair Unit. That is not all. Under this deal, the Air Force has agreed (in terms of the contract) to pay higher prices for the MiG aircraft which they did not deem fit to procure earlier, according to documentary proof obtained by The Sunday Times……

"Making the situation worse, The Sunday Times investigation reveals, is the composition of the four MiG-27s now being procured. Two of these aircraft were offered to the Air Force by D.S. Alliance Private Limited in May 2000 at cost of U.S $ 1.75 million (or Rs. 189 million) each. The Air Force did not deem it fit to obtain them. But they are now being purchased at a cost of US $ 2,462,000 (or Rs 265,896,000) or by paying a further US $ 712,000 (or Rs 76,896,000) according to documents in possession of The Sunday Times.
"A third MiG-27, also offered to the Air Force in October 2000, by DS Alliance Private Limited, documents reveal, for US$ 1.6 million (or Rs 172.8 million approximately). Here again an excess sum of US $ 862,000 (or about Rs 93,096,000) has been paid for the same aircraft which was not deemed fit for purchase earlier. It is not clear how prices of old aircraft are higher when they should be lower as they age. Unlike antiques, they do not have value as they become older.

"The latest Contract between the Air Force and Ukrinmash, through a third party (Bellimissa Holdings Limited), is in two parts. The first is for the purchase of four MiG-27 ground attack aircraft. The second is for the overhaul of three MiG-27 M aircraft and a MiG-23 UB trainer, all of them currently part of Air Force assets.

"Another shocking, if not unconscionable, feature of this overhaul, The Sunday Times investigations reveals, were the costs. The fee for the overhaul of the MiG-23 UB trainer, according to the contract, is US $ 1.1 million or (Rs 118,800,000). Documentary proof obtained by The Sunday Times shows the cost at which the Air Force purchased this trainer in October 2000 was only US $ 900,000 (or 97.2 million). Hence, it defies all logic that an overhaul is more costly than the purchase of a trainer MiG aircraft".

The Sunday Times (Situation Report) of October 29, 2006, revealed the full text of a letter written by Sri Lanka's Ambassador to Russia, Udayanga Weeratunga to the Commander of the Air Force, Air Marshal Roshan Goonetileke. In that letter dated October 13, 2006 , he declared:

"I would like to bring to your kind notice that on my request, the Government of Ukraine has enforced a new special regulation with effect from 01st October 2006 for the Ukranian companies which are involved in defence supplies/services to Sri Lanka. According to the new regulation, those companies have to get confirmation on the authenticity of the End User Certificate issued by the buyer, via the Diplomatic Mission of Sri Lanka based in Moscow. This regulation will apply to all pending supplies. My request was made with the purpose of avoiding illegal/terrorist organisations importing defence items from Ukraine…….
Hence, Mr. Weeratunga made clear that "The State Services of Export Control, who issues the export licences to suppliers, hereafter will not issue the licences without confirmation of this Mission on the authenticity of End User Certificate issued by the relevant buyer of Sri Lanka."

With that request made directly to the Commander of the Air Force, instead of going through the Ministry of Defence as is the practice, the Sri Lankan Ambassador in Russia took personal control of all military procurements from Ukraine. Thus, the MiG deal also went through -- with the Ambassador playing a direct role in the procurement/overhaul process in addition to exercising supervisory control. The MiG-27s arrived in Sri Lanka only in December last year and thereafter. Yet, a third party remained involved in a Government-to-Government deal. Now it is the very Ukranian Government that Ambassador Weeratunga claimed he persuaded to introduce "new special regulation" that wants to find out what has gone wrong.

Soon after the December 3 report appeared in The Sunday Times, the Media Centre for National Security said in a statement, "The Government vehemently denies any inconsistency in the 2006 MiG 27 ground attack aircraft deal with Ukrinmash, Ukraine." Later, the web site of the Ministry of Defence gave a lengthy account of what it dubbed as the "MiG-27 - Inside Story." The assertions in these two statements led to the main opposition United National Party (UNP) commissioning a detailed study on the exclusive revelations in The Sunday Times. The report, released to the media last week, said among other matters, that the MoD statement deliberately altered known facts. It said that the corrupt deal contravened Government procurement procedures.

In the more than two decades of separatist war, not one side has fully won completely defeating the other so far. Those who have won heavily are only those corrupt who have become billionaires and millionaires overnight through military procurements. They are both in uniform and outside it. The more successive Government leaders have pledged to deal with the corrupt; the more things have remained the same. Nevertheless, the stakes have become higher and higher.

A vast segment of the population is reeling from the heavy burden placed on them by the mounting cost of living. Prices are rising daily. A few peons, clerks, constables and the like are being rounded up for taking a few hundred rupees. However, those dabbling in millions of dollars or billions of rupees in military procurements get away in this paradise isle. The only casualties are those exposing them. They continue to become prime targets and many an embarrassed official want to hound them out. Little wonder, to some, war is big business.

MiGs loaded with millions in mega frauds