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Swedish Government-Industry Ties Under Fire

Stockholm Probes Creation of Shell Company

Apr. 1, 2012 - 11:20AM   |  
By GERARD O’DWYER   |   Comments
Sten Tolgfors, center, answers journalists' questions on March 29, 2012 after a news conference in Stockholm. Tolgfors resigned as Swedish defense minister following weeks of controversy over the revelation that Sweden had entered a deal to help Saudi Arabia build an arms factory.
Sten Tolgfors, center, answers journalists' questions on March 29, 2012 after a news conference in Stockholm. Tolgfors resigned as Swedish defense minister following weeks of controversy over the revelation that Sweden had entered a deal to help Saudi Arabia build an arms factory. (Fredrik Sandberg / Agence France-Presse)
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STOCKHOLM — The resignation of Swedish Defense Minister Sten Tolgfors has reopened scrutiny of the government’s relationship with Swedish-based industry, along with the government’s connection to the raging controversy around top secret plans to design and co-finance the construction of a weapons manufacturing facility in “black-listed” Saudi Arabia.

More expressly, the spotlight has fallen on a government promise, made by Prime Minister Fredrik Reinfeldt’s center-right administration in 2007, to collaborate with industry to promote Swedish military exports, particularly in high-demand, emerging markets in Asia and the Middle East.

The government’s promise to open export markets for Swedish contractors helped appease a defense sector hurting from the government’s new “more bang for the buck” policy introduced that same year. The initiative redirected procurement strategy away from home-grown weapon systems to off-the-shelf solutions available at a lower cost from international suppliers.

On March 29, Tolgfors resigned amid revelations that the government had cut a secret deal with Saudi Arabia to build an anti-tank weapons factory in that Middle Eastern country. What that means for future exports, which are crucial to Swedish businesses, is unclear.

The estimated initial $400 million capital value of the proposed Saudi weapons plant included direct Swedish involvement in its design, construction and outfitting. Moreover, the Swedish defense industry would have supplied all relevant production technologies and lines, as well as personnel training in what would have effectively been a turnkey project.

“The Swedish government and defense industry leaders usually sing from the same page when it comes to raising the country’s export potential,” said Christian Schmidt, a Frankfurt, Germany, industry analyst. “It remains to be seen if the Saudi project was part of the promise to better support industry in 2007.”

Under the Microscope

The risks of doing business with Saudi Arabia without properly informing Sweden’s legislature should have been obvious to industry and political leaders, Schmidt said.

“If the Saudi deal under discussion was part of a broader scheme by the government to expand Sweden’s military exports through capital projects that were not alone part-funded by the state but supplied by defense industry groups, it does seem to have back-fired,” said Torbjörn Björlund, the Left Party’s spokesman on defense.

The Saudi controversy will again put Sweden’s defense sector and export activities under the “microscope of political and public opinion,” said an insider at Saab, the country’s defense and aerospace giant.

“The ethics-based arms export control laws we have in Sweden are quite strict, and certainly much tougher than in most other countries,” the insider said. “It is hard to see the positives in this situation from the point of view of industry, except perhaps that it will create conditions for a serious debate on who Sweden can do business with.”

In the meantime, the Swedish government has multiple investigations in progress as it tries to pick up the pieces.

“The defense minister may have resigned, but we need the investigation to continue. We need to know who was involved in the proposed Saudi project, and we also need to know who the different players were, and the extent of the role played by the [Ministry of Defense] and the government,” said Peter Eriksson, the Green Party’s head of the Parliament’s Constitutional Committee (Konstitutionsutskottett).

The task of restoring the government’s and MoD’s credibility will be headed by Catharina Elmsäter-Svärd, who will move from her Infrastructure ministerial portfolio to replace Tolgfors.

The Greens played a pivotal role in Tolgfors’ resignation, having lodged an official complaint against the former defense minister with the Parliamentary Committee on Constitutional Affairs in mid-March. The protest accused Tolgfors of concealing the MoD’s role in the Saudi venture.

Several investigations have been launched into the Saudi affair. The first inquiry is being led by the Economic Crime Bureau (ECB) and will examine the role played by FOI, the state defense research institute.

The parliament’s constitutional committee will begin its own inquiry once the ECB files its report. This is expected within two months.

“The FOI has already admitted that it was involved and will cooperate with the police, so we expect a quick investigation here,” Eriksson said. “I do not see a conflict between the police and parliamentary inquiries, although it may delay things if the police inquiry drags on.”

The official investigations are happening against a backdrop of embarrassing revelations for the government. They include the disclosure that the FOI sourced external funding from various state agencies to establish a shell company, known as SSTI, to serve as the corporate vehicle to plan and drive the Saudi project.

The parliament will investigate evidence that the FOI provided a significant portion of money to establish the shell company, and to develop and commercialize the Saudi weapons project proposal, from classified funds controlled by MUST, Sweden’s national military intelligence agency.

Armed Forces Command (AFC), which has responsibility for MUST, has conceded that it made several transfers of funds to the FOI.

“Funds were transferred to the FOI, but we do not know what these funds were eventually used for, or if they were used for the SSTI,” AFC spokesman Erik Lagersten said. “Our role is to support the FOI and work together, so there is cooperation. The nature of our work and cooperation is confidential.”

The ECB investigation has placed a strong focus on the shell company’s formation and funding. Initial findings by the ECB suggest the company was predominantly “cash financed” to minimize the risk of leaving a paper trail after it was incorporated in 2009.

“Whether the FOI has used the funds in an incorrect manner is a matter for the ongoing inquiry,” Lagersten said.

The FOI has launched an internal investigation to determine if the organization, directly or indirectly, financed and fronted SSTI.

“I take the reports that have come to my attention very seriously. Such reports are the reason I reported the FOI to the authorities,” said Jan-Olof Lind, the FOI’s director general.

The ECB investigation also is centered on the role of Dick Sträng, a former FOI executive who is thought to have been instrumental in the formation of the SSTI shell company.

One of the key issues for the planned parliamentary inquiry into the affair is the high degree of secrecy around the project, even at the cross-party committee level.

Sweden’s constitution prohibits the government from developing any form of defense-industrial or military cooperation with so-called “dictatorship states” listed on the country’s military exports prohibition register. Saudi Arabia is on the register.

The parliamentary inquiry, in particular, must examine the reasons the government needed to support a project that would clearly benefit Sweden’s defense industry, said Urban Ahlin, the Social Democratic Party’s spokesman on foreign affairs.

“Whatever happens, the constitutional committee’s investigation should explore all avenues to unravel the facts behind this secretive plan,” Ahlin said.

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