Prof. Dr. Mark Pieth 2nd August 2007

Strictly confidential

EXPERT OPINION

by Prof. Dr. Mark Pieth

submitted in the pl~oceedings

Beverly Securities Limited (BSL)/ Beverly Securities Incorporated (BSI)

And

Kredietban k Luxembourg (KBL) and others

Claimant

Respondent

................................................................................................................. I . Introduction 3

1 . Qualifications ................................................................................................... 3 2 . Mandate ................... .. .................................................................................... ?

.................................................................................................... I1 . Background and Facts 4

1 . Facts as given hy Ronnard Lawson ................................................................... 4

Summary and Questions ............................................................................................. 10

1 . Summary ........................................................................................................ 10 2 . Questions .......................................................................................................... 11 9 .................................................................................... 3 . Structure of the opinion I I

The Role of KBT, in Helping Armscor Undercut the UN Sanctions .......................... 12

I . Luxembourg's rules against sanctions busting . rnnney laundering and 011 fit and proper conduct of bankers ........................ .. ........................................ 12

................................................................................................ 2 . KBL's conduct 15

The Behavior of KHL towards BSLJBSI ..................................................................... 16

1 . Civil law ...................................................................................................... 16 ................................................................................................ 2 . Regulatory law 16

1 3 . C1.iminnl Iaw ..................................................................................................... 17

Conclusion ................................................................................................................ 19

Introduction

My name is Mark Pieth and I was born in Rase1 on March 9, 1953. I am Professor of Criminal 1,aw and Criminology at the University of Bascl, Sxvitzerland, and during my carecr I have engagcd in private practice as a qualified advocate.

Qualifications

From 1989 - 1993 1 have heen I-Iead of thc Section of the Economic and Orgnnised Crime of ihc Swiss Fcderal Ol'fice of Justice (Federal Ministry of Justice and Police). Tn this position T was involved in drafting legislation and writing bills regarding Swiss law. in particular relating to money laundering (both criminnI and regulatory law), mutual legal assistance, organized crinzc. drug abuse, corruption, corporate liability as well as confiscation of assets.

As an official, and later as a consulta~~t to Governnlent I have acquired extensive experience in international Ibra, notably as a founding member ot' the Financial Action Task Fo1.c~ on Moncy Laundering (FATF) between 1989 and 1993, the Chemical Action Task Force on Precursor Chemicals and as thc Chairman of thc OECD Working Group on Bribery in International Business Transactions (since 1990 until today). As of 1999. 1 have been a facilitator and founding meinbcr of thc "Wolfsherg Group of Private Banks'' on customer due diligence (see wc\w.cvol I'shcr~-p~~ii11:i~;r1~~.1:~~1i~$ I was able to Lilrther deepen my expertise on --- money laundering. c~~rrupt ion and other abuses of the financial sector when 1 w a s asked by the Secretary Gcneral of the United Nations to act as a member of the Independent knquiry Comn~ittee into the Oil-for-Food Program of' rhc LV in Iraq (SIC). togetlles with Paul Volcker and Richal-d Goldstone in 2004 and 2005.

4. I am f~~rthcrrnore Chairman of the Basel Institute on Governance. a specialised. University based research, training and policy center focusing on public and corporate governance as well as on asset recovery (through its International Center on Asset Recovery. ICAR).

5 -. I have published extensively in the f eld of economic and organised cri111e (including money laundel-ing. corruption. organised crime, corporate liability. finai~cing of terrorism).

2. Mandate

6. I have bee11 asked by Bonnard Lawson. an internalional law firm hased in Gencva. to provide my views and advice on events dcscribcd in the following sunmary of facts. I have furthermore been providcd with

- an Initial Outline of Facts, dated June 27.2007,

- an Expert Statement of Mr. Christian Weycr. expert in international hailking activities and scnior management.

- an Expert Witness Statement by Mr. Philippe Mortge, expert in forensic accounting.

- a Witness Statement by Mr. Martin Steynberg, former employee or the Arn~scor Group. South Africa.

The mandate which Bonnard Lawson kvish me to address is based upon thc following:

- lflat I possess thc necessary expertise to express views and advice on the issues arising in respcct of events described in the Summary of Facts.

- that I have been afforded proper opportunit). o f rcscarching and anal>-sing thc issues referred to.

- that having undertaken the appropriate research analysis, I have heen able to reach and express my own conclusjons.

- that I have no prior relationship with Bonnard L-awson aildlor the clie~zts HSL/BSI for whom they act in connection with the case described in the Sumnzary of Facts.

Attached I~eretc, is a copy resume of my career which identifies the basis of my expertise as well as a list o f publicatiuns.

I Background and Facts

1. Facts as given by Ronnard Lawson

9. Tlze follawiilg Fact Summary has been pro~tided to me by Bonnarcl Lawson:

"Our clients are BEVERLY SECURITIES LlMl TED (BSI,). an lhglish Privnte Limited Company. and its sister company BEVER1.Y SECURITIES INCORPORATED (RSI), a Panamanian Company, (regether RSLIBSI), both owned by a I,icrhtenstein Anstalt. ESTAR1,ISSEMENT EUROPEEN DDE FTNANCEMENT (EEF) held for the benefit of the Pinhol fatnily of Lisbon.

Tn thc 1980's and 90's BStIRSl were active in international tradiny activities, often as interincdiary. Operating from Portugal, I3SLIBS1 werc represented by General Henri Troni, a highly respected rortner Gencral in the Portuguese Dtrfcnce Forces. Mr Luis Pinhol. also a respected former military officer, and his son, Mi- Jorge Pinhol.

THE ARMAMENTS CORPORATION OF SOUTI-I AFRICA (Arn~scor) is llle state-owned South Arrican corporation responsible for procurement and sales of defence equipment and other materials. including those for the Emergency Sen~iccs sector. in that country. In the 1980's and early 1950's (during thc years ofthe 1I.N. Embargo) Arinscor was answerable only to P.W. Bntha. who hccame the President of the Republic of South Africa and rctained effectivu control of both thc Defence and Emergency Services Po~~fol ios .

When the mandatory satictionc were itnposed against South Africa, Artnscor already possessed a considerable fleet of helicopters designed and manufactured by Aerospatiale. Given the circumstances, it had becomc evident that Sourh Africa needcd 10 irpgrade its f l c u ~ by the introduction of greater capacities which would enable search and rescue rnissions to be far mnrc eatensive. For this purpose in rhe 1980's Armscor entered into a large progranlnle with the starc-owned Aerospatiale of Fsancc fbr upgrading and expanding South Africa's flcct o f Puma Search and Rescue (SAR) Ilelicoptcrs acqu~red from Aerospatiale of France. As explained below. the progranlnie \\as top secrct and \?[as code-named Prqject Adenia.

BSLIRSI pIayed a critical role in Project Adenia. through its close contacts with key members of tlic Portugucsc Defknce Establishment with whom BSLIBSI dealt. inclr~ding General Brochado d e Miranda (Chief of Sraff for the Portuguese Air Force), General Soares Cameiro (Chief of Staff for the complete Port~lguese Arnied Forces), General Casin~irn Proenca (Preside111 of tNDllP a leading manufacturer to the Portuguese Defcnce Industv) and Gcncral l i u i Espadinlia {Hcad nf OGMA, the logistics business providing technical support to the Po~tugucsc Air Force). Each knew and ruspucrcd Genera! l'roni and Luis Pinhol. and accepted BSUBSI's request made on Armscor's behalf to establish a Portuguese channel for Project Adenia deliveries from Aerospatiale to Armscor ofrhe S A R helicopter kits.

Arrnscor's main bank in Europe during this period was KRFDIEUI'RANK 1,UXEMHOURG ( K B L ) . today a major bank in 1,ulremhourg owned by the K R U Group N.V.. a f 3 hillion cornpany listed on the Euronext Stock Market in R r u ~ s e l ~ .

Thc Project Adenia supply contract was conceived. negotiated and iinplenlcnted bctwcen ACrospatialc and Armscor during the period of the mandatory U.N. embargo on S o ~ l t l ~ Africa instituted in Noveinber 1977. U.N. Resolution No. 4 1 X precluded "urq.prnvi.vion to S o ~ r t l ~ Afr-jcir r > f arms and relatetl materiel of all types. ~ n c l r r ~ l i n ~ ~ h r srtft' or II-(JUJ;~PI. of weapons and ammunition. military vehicles and equipment, para-rnili tan, police equipment, r 1 / 7 d sp:por.t. p4rr/s,fi)r. rhr ~1fot~ernot7rionc J". The Resolution a l ~ o prohihi ted the provisinn of any "cq~ripmcr~t rrnd szrpplier. o17rJgr.u1r!,c o f lice)-rsrn*q armn~u?nunts,for t l ? ~ ~~CIIPI!~OCIIIVU OT nlnmfetlnrlcu of the nforen1et7tior7ed " finiphnsic added ). Many other regional (E.U ) and national embargoes (the U.S.. amongst others) were also in effcct at tho time. The U.N. mandatory embargo against South Africa was offic~allq accepted by the Duchy of Luxembourg in January 19781.

Despite this mandatory embargoes, Armscor succeeded. with the help of K R L on the payment side ro enter into and implement a number of important international procurement projects during the 1980's and 1990's. in direct and ii~tentional breach of such einbar20cs.' KUL, with assistailce of its sister company, Kredietrust Luxembourg (KTL). proposed and managed a complex structure ol'liundreds of front company and jump account payment channels for these procurement projects, thereby directly facilitating Armscor's financial hansactionr by conduct consistent with classical methods of aggravated money laundering and corrupt financial practicer to avoid the consequences ofthe mandatory embargoes on South Ahica. BSLfBSI has obtained cvirlenct ortllis "grand coinplicity" between KBL and Armscor. It was because orthis complicity that Armscor was ablt. with KHI, 's help. to deny BSL/BSlqs commfssion payment. as explained below. The natiirc and extent ofthe KHI- involvement in Armscor's business is explained in the attached Expert Report of Philippc Motrgi..

In channelling Armscor's vast movements of r~inds horn South Africa to 11s various suppliers, including ACrospatiale, tllrough those many complex and hidden pnymcnt channels, Kt3 I, irere afforded total insight into the nature and pattern of Armscor's commcrcinl aclivilics.

I Letter dated 9 January 1978 from the Permanent Representative o r Luscinbnur~ to the United Nat~ons addressed to the Secretary General.

2 By way of illustration, BSLlBSl's evidcncc confirrns that other Armscor procurement pro-iects at 11ic rimc included, amongst others:

(a) Project Austin - Electronic Warfare Sy~teins,

(b ) Project Nimrod - Mirage Weapon Systems.

(c) Project Keepsake - Air to Air Missiles,

(d) Project Buzzard -Nuclear Componcnts. P r q j c c ~ Papinu - Henetta Guns, and

(e ) Project Scumrner - Armoilred Vehicles.

Each o f these was clearly within the U.N. embargo. Together. they totaled billions of dollars of husiness for tllc suppliers located around the world. ~ h o received typically a ?On,'o prcn~ium or more on the normal price.

Prqiect Adenia. involvirlg sale to South Africa of unarrncd SAR helicopters and rtlated parts and scrvices. was not such an .'arms" acquisition programme and hence w a s not precluded by the IJ.N. or other Sanction Resolutions or othenvise illegal.' While the entire scope nf Project Adenia had not been disclosed to BSLIBST, those latcr havc evidcnce from former hrrnscor employees that I'ro-iect Adenia had a total value of some 3 Hillioti USD. The overall value of hnnscor's Prqiects involved sums totalling 12 Billion USD or more.

Nevertheless. Armscor and Aerospa~iale and their respcctivc state-ouner were consciot~s of the political sei~sitivity of any commercial activity with Soutli Arrica wl~ich Icd thein to conduct Project Adenia, as with all of Arrn~cor's programmes, under a strict "top secret" regime. Minimum documents were prepared and those that were required were held and transferred always under diplomatic cover. Armscor's con~rnercial activitie5 were conducted oil{ of offices (called Technical Committees) in the South African Embassies in Paris and Tel Aviv. Project Adenia was negotiated and adrninistcred on Armscor's side in Paris.

The commission agreement reZating to HSL/RSl's role in apei~iilg the Portiiguese channel was agreed in July 1987 by Mr Pinhol Tor RSL/RSI and Mr Restbier for Arn~scor. It provided tbr a cornmission rate of 10% to be paid over the total of the goods and scrvtces delivered in Prqiect Adcnia. Aerospatiale accepted to covcr 50% of this co~nmission cost, as 11 did nut havc to pay its customary corn~nission agent in Portugal. While this commission agrecmenl was oral, i ts terms were rccordcd in a duly-signcd Armscor memorandum. llcld in Armscor's urfice in Paris for use by the ndininistrator of the Project Adenia cantmct. 'The existence and terms ofthat official document have hcen confirmed in sworn evidcnce HSL!RSI ha5 obta~ncd frntn former Arinscor ernployee~, including that contract administrator.

RSLIBSI also succeeded in negotiating coinpcnsation for Porttigal whose Air Force's fleet of P~utia helicopters necded upgrading in order to perror~n its NATO search and rescue oblieatioirs Arn~scor agreed to procz~re at its cost within Project Adenia upgrade kits and parts required by the Portr~guese Air Force.

BSLIBSI co~npleted its side of thc commission agreement, causing the new Portliguuse channel tu be successfirlly opened". A f t ~ r some delays relating mostly to polrrical concerns within Frailcc and within Aerospatiale. Project Adcilia deliveries started in 1989, including the kits for the Ibortugucse. The agreed BSl,/BSl commission was. however, not being paid. Scnior Armscor executives assured Mr Pinhol that it would be paid. although i t is now clcar they did not intend to do so, and that Arnlscor was engaged in deceit against BSK,!BSI. These executives were concerned tllat if Mr Pinhol

1 The intendod function and use of these S A R helicopters supplied urtder Project Adcnin has been described as follows:

"There ,ft(ncfiorrs molrrclt. l/rc munitnnng rd' cn?n,n~~rr~rrl sl~rpp//ip act~vilru~r r ~ n d rr~sr.lfin~q , I J r ~ t ' l t t ~ ~11711'

Coclrtrrl ,I~u~ci,,~umt~t7t in d~>/ucrirlg rrrl ~ i r l ~ , oil pollr(fion. L I I ~ L I I U I ~ U . F I ~ I ~ I ~ E ~ I I ~ ~ (IS V Z J L J ~ ~ ( I S I I I ~ ~ ~ ~ I I O ~ I ~ ~ R I I I C > . ~ U I

, f ihinp ncrhqitie.s { I T rhr RSA "T FUOnm Evclrta.t~~r~ E~nnnr?llc Zone Tha Sqlraclron rrl.vo assistc tlir Snlrth Afiicrrn Search-nnd-Rusctre Or,qar~r:nria~~ (3S.4 R) J!v sirpph7ing rr 24-hnlo. r~ro~rnrl the clock Lrrrrd utrrl Sea Search-rmd-Resc~re swvire In Ihe co~rr~t~?~. Rnc r$ rheir. lilrwc i~orcrhlr r . i ~ ~ ~ ~ ~ ~ h 1 1 1 ~ 0 1 i ~ it1 !hi7 nrurm ~ ~ r s their. I ' L < S U I ~ ~ qf' 5iY: pt'upie ji-otn the Greek Ibwr Ocerr~~os n e w rile East I,o~~rlor~ colrsl i l l .+l!rgttct 19Y I rrsing some Id helicopter^ "

The website M\rw.sasar.gov.La provides a clear picture of the scope of resp~nsibilir)~ for such '.search and rescue missions" in South Arrica. Portugal's fleet of scarch and rescue htlicoptcrs can he found at thc wcbsite 1+~~t~~~~.cmfa.pt,'rr~zvw~esquadras~esquadrasdetalhe.php?lan~=ingkkey-e75 1

I When BSLIDSI informed Arnlscor that the channel had been approved, Armscor officrals wisltcd to test it in 1986 which was done in a "trial rhn" involving n single-delivery trial run of a night flisht gutdance system to be delivered Frot~~ France via Porti~gal ro South Africa. This rest, code named PrNect Orion. was successfirl and assured Armscor that BSLIRSI had indeed done hat had been asked of it for Project Adenia. As was customary, BSLfRSI dealt with Pro-iect Orion in an oral agreement, commercial goodnill and trust. Following completion, Arm~cor paid a commission of 25.000 USD from at1 account it controlled at KBL to a BSI account a t Credit Suisse in Zurich.

bccame sufficiently cuncerned over the commission, he could cause the Generals to stop the deliveries through Portugal until the matter was rcsolved. RSIA/BSI has sworn cvidence From the Generals involved that. as the business was being done elltirely on trust and good faith. Ilad BSLIRSI infunned them of nny wrongdoing by Annscor, they would have not gone forward.'

It was a t this point, in early 1990, that Amscor solicilcd the asqistance o f KRI, in its prograinint. of deccit against BSL'BSI. KBL agreed tc7 open a new bank account Tor B5L in lduucinbourg for ihi- ostensible (but deceitfill) purpose of receiving thc 10% commission due 011 Project Adenia. KDL th i~s received Mr Pinhnl in its office? nn 9 February 1900. Mr Iyinhol w a s introduced by an Armscor emplo>ee working at the Embascy in Paris for thar stated purpose. The account docurnent~ had already hcen tilled in by the Bank's officer. when the meeting started

As KBL had n n prior knowledge of BSI,, its Owners w its Management, and no enquiry of any sort was directed to BSL. KRI , received all information ahou~ its new client from Armscor, whose representatzve confirrned at the meeting that the purpose of the new HSI, accolrnt was to rcceive the commissions due from Armscor.

The docunlents presented at the mecting included at1 applicafiorr for tlic opening ofthc bank account wl~ich after signature by Mr Finhol was attributed the account numbcr 2 10370. MY Pinl~ol was also shown a marketing style booklet about the Rank's rules and practices for cuslomer accounts, 1x11 the contcnt was nn1 discussed. 'I'IICY also includcd, again without explanation Powers of Attorno>/ in favour of Armscor's employees for Mr Pinhol to sign. In signing thesc documents, Mr Pinl~ol felt re- assured that BSL/RSI's position was hein? properly rcspected and was particularly cornForted in that respect by the behaviour of the KBL account officer, having no reason for doubting the i n t e ~ r ~ t y and standing of that officer or the Bank, ~ v h o had full knowledge o f the asserlccl purpose of Ihc new accotlnt. i .e. to receive thc 10% commission due on Prqiect Adenia. Noting that it zvould be a rather large sum, the KRI, account officer congratulated M r P~nliol.

'She opening ofthe new account in ordtr to permit the commission to be paid conveniently and discreetly to BSL re-assured BSLIRSI. No doubt as to Armscor's or KBL's good kith arose. This interpretation was inisplaced as KEL and Annscor !%ell knen .L~ern the outset that the real and deliberate cause and effect was to lull RSLIBSL and its Senior Manageincnt into a state ofbclief sllch as to stop the cxercise o f the commercial veto. Achieving and maintaining such deterrent ovcr BSL!&SI's use of its influence was important to KRL, Amscor and their respective Senior Managements, to ensure not only thc successful conduct of Project Adenia. but also ta maintain the matrix of KRL's secretive and highly lucrative financial activities for Armscor.

ELS and R S I have conduaed their buriness together, each making their respective contribulions to the matters at hand. A1 the direction o r the cotnmon owner of these two companies. RSI,~RSl worked in conjunction with each other in discharging the obligations they had under the coi~imission agrcement with Arnmscor. The account at KBl, was opened fnr theirjoint benefit nnly in the name of HSL. an Engl ish-registered company.

BSL, as a client of K U L relied upon KBL's respect nfils duties under ~ h c banking contract and the governing Luxembourg law'. includlns the duties r-rf,oood faith, loyally. advice and infnrrna~ion." By its general and continuing coinplicity in Armscor financial affair? and its particular complicity in Annscor's schenlc to deceive BSUBSI about i t n commission payment in order to kccp the new Portuguese dclivery channel for Project Adcnia in operation. KBL lras violated these dut~es, l'hat is the legal hasis of RS1.IBSI's claim against KBL, and the Senior Management involved. for rocovtpm of its commission.

At no time during these events, did any Armscor repl.esentative raise issue over BSLiBSl's com~n~ssion entitlement. I t was only later when evidence eventually emerged, t'tmat Mr Pinhnl and

F In a reccnt statenlent, General Mirnnda has confimicd: "If BSI,/RSI. had informed m e that the South African Company was acting or I-iad thc suspicioils tlial it was acting in a dishonest or had fi~itli manner. I would have taken rhc decision to deny the perforinailcc of said Project."

( 8 That KBL has violated its banking duties to HSI, its client has hcen clearly confirrned by Luuernbourg counsel and in an Expert Report from the former President of Banque Pnribas (Suisse'). attachcd.

lcgal advisors to BSI,/BSI realized that tlic events involving KBI, and Armscor in the opening of tlic BSL bank account at KBL were pan of a deliberate and deccitful ploy by Armscor and KBL to prevent the risk of BSL/BSI exercising its keto over the new Portuguese de l iven channeJ duriilg the delicate period of its starting up in 1989-1890.

In late 1991. Mr Pinhol contacted Mr. Pik Botha. then Forcign Minister of t l ~ c Republic of South Africa. who afforded a sympathetic hearing o f BSLtRSI's coinplaint relating to Armscor's refusal to lionour the commission sgrecment. The Ministcr offered to investigate tElc matter and did so with the assistance ofthe RSA Ambassador to ~ o r t u ~ a l . ~ T h u s , two important RSA ofticials concludcd that BSLIBSI had been mistreated by Arnlscor in denying the IQ1'/o commi~sion. Pik Ootha did firs best to get his Governmcnt colleague, the Defence Minister of the Rcpublic of South Africa, to correct thu situation.

Minister Botha urged in a menlorandurn dated I st December 1992 that the DSL:RSI co~nmiwion clai~n be resolved so as to avoid a political incident b c t ~ e e n Portugal and South Africa. Hc noted that Porti~gal had remained one of South Africa's strongest allies throufhnut the sanctions period."~u efforts of thc eminent Foreign Minister and his officiais in 1993 became fru~trated notjust hy the whitewash of Annscor's "Internal lnvestrgation" LIE also htcause of the liuge pol~tical events tlicn leading to the cnd nf the Apartl~cid Regime and the introduction o f a new ANC controlled Government in 1994.

For many years thereafter, supponed by their Governinent Owners and Controllers, Arinscor and Aerospa~iale. as well as KBL. deliberately engaged in a further and cclntinuii~g campaign of widespread deceit and obfuscation designed to prevent evidence cnlerging to reveal Ihc truth oS what had taken place. They also knowi~~gly cngaged in acts and omissions ~ t h i c h seriously misled Co~irts in which they had appeared to answer previous proceedings by which RSL/BSI had sought relief.

In the RSA proceedings in tvhich BSLiRS1 sought for an accounting of Pro-iect hdenia, Counsel who appeared for Armscor asserted that no comrnerciul relationship existcd betwcu11 BS1:RSL or JP and Armscor. Yet in a statement obtained later. the former Head of Arinscor in Pal-is, Toni d e Klerh. an Attorney admitted to practicc in South Africa in 1972, declared "in I-rew n f tr;~,pcl-soncr/ knoli./cdge nf tltv occurrences ~har led to ~ht . devulnpr~~r t~ t #f'fhrs cl1ilnt7c.l. J Irglrs ~ o r ~ \ ~ i n c . e ~ l ~ l r r r ~ Air Pinlrnln.v h1,sinc.s~ urns e ~ l l i [ l ~ d IO C O I ) ~ I ? ~ ~ S S ~ O I T ~ I I V the senhices ~ ' h i u h he rrnriertd. "

Furthermore in the same RSA proceedings. whilst claiining privilege on groundc c?f national security, Arnlscor failed to disclose to the Court that they we1.t activeiy cngaged at that \cry time in n Project code-named Massada. the prltpose of wlrich was to destroy/qunrantinc documentation concernin? Project Rdenia and othcr Artnscor Proj~cts of much greater sensitivity.

The perceived danpers of BSLIRS1'5 claims against Armscor led the Chairman of Aerospatiale to write a lctter dared the 3rd May 1.996 to thc RSA Anlbassador in Paris urging that "usse~~tiol ~neaxurcs" (intclligencc speake h r taking someone out in a murder sci~se) bc taker1 against Mr I'inhol to prevent the steps BSL,'RSI were pursuing. I t tras ohviaus that mucli t ime was at stake than n simple claim for unpaid commission.

7 The Ambassador co~lductcd his enquiries. including a series of meetings in earl) 1992 wit11 those involved. By letter dated 2 1 April 1992, he reported to Pik Botlra, the Minislur: "After the period January 1992 until 11otv, and after my second discr~ssion ~ \ i th Ger~eral Miranda 1 must inform you that I am convinced that Mr. Pinhol. with rckrence to part 2 of his letter to Armr;cor dated 29 January. 1992, may justly say: ..RSI initiated all negotiations with (FAP) Portuguese Atrforcc in order to obtain pcr~nission k r the kits to he manufactured at OGMA ".

8 In advising JP that RSL/BSI Gas best advised to pursue its case th ro~~gh legal action. Pik Bolha espresscd dc tp regrets and misgivings since it was obvious to hint that the appropnalc course fix Armscor \vas to scttle out of Court. l le also said in a sworn statement provided to BSLIBSI: "I UTI.S l s ~ . fhrr~ conrirlcr~d / I l o r

A h . PIYIIOL wcls I P , ~ ( I / / J J R I T L ~ rnornI!l. e t~ t i t I~ 'd 10 p ~ ' ~ n e n f J i w f h ~ dcc i s i~~e l~ , i t ~ r p o r t r ~ ~ t .vet.vic~~ ru17d~st.er/ /?' l ~ i t ~ f anJ1or / 7 i ~ cunlpnrnv BSI "

I t was only during the lawsuit in South ~ f r i c a , ~ that BSL'RSI, having littlc by may oTconcrete evidence to support its case. learned that Pro-iect Adcnia delivtries also include 50 ncw helicoplcrs equivalent to Super Puma (~ubseq~~en t ly branded as an OKYX by the South Africans) delivered to Arrnscor in kit form. raising the value o r t l ~ e contract and the cornmis5ion due. It \$as also latcr learned that the Project included maintenance and other services to Annscor.

In the 198: South African proceedings BSLlHSl sought relief in the form o f a monetary judgment. an accounl and a declaration. due to the lack of evidence to prove the oral commission agreement and given Armscor's defence orprivilegc and natinnal securit!.. Senior Counsel advihcd BSLlHSl in 1984 to withdraw the proceedings, tvhich was done without prejudice.

At rhe time of the South African proceeding, Mr Pinliol spoke ta the account manager at KBL. who had declincd to take his calls a1 previous occasions. During a hrief'conversa~ion. he drew attention to what was happening in South Africa and sought KRL's coopera~ion as well as to he informed about rhe BSId account. The account officer rclirsed to discuss the DSL account and, for the first time. indicated that the BSL account was clnstd and that he had nothing further 10 add. He then piit the phone down on Mr Plnhol. BSL has ncver had any esplanation from thc Bank.

RSLIBSI was therl advised it could pursue ncw legal proceedings in France against Eurocopter. the successor tu Aerospatiale, bawd on unjust cnrichmcnt. It was hoped that such proceedings would unearth mare evidence of wha t had taken place in Ihe management of Project Adenia and the BSL/RSlls commission arrangeinent. ~ h i c h the Manufict~~rer and thc Suppjier had each agrccd to support to the level of 50%. As in South Africa, the claimants in the new Frcnch action wcre, in the end. unable to obtain discover?l about Project Adeilia or about thc BSLIBSI comrni5sion agreeineilt with Arrnscor. Again, a p o ~ e r r u l state-owned defendant war; able to ovcrcotne the claims, rchich were rqiccted. confirmed on appeal in 1999.

It was thmugh these persistent actions in the 1990's that individuals with knowledye orthe relevant matters eventually made then~selves known to RSL/BSI and provided starcinefits of what in fact happened. This evidence which emergcd only in rhc late 1990's confirms that Al-mscor made sci-icrus ~nisrepresentations in thc South African Court. particularly in respect of its corninel-cia1 relationship with &Sl,IBSI and its agreemen1 to pay a commission For BSl,!RSI's role npuninf: the crilically important Portuguese delivery channel for Pro-iect Adenia.

This contirnicd the new South African Government's intcrcst to explorc events at Arrnscor during and towards the end of the Apartheid Regime in the earl>* I990's." I t became apparent that South Africa itself had been defrauded of 900 million USD throtigh the financial activrtics of some Uorrner Senior Managelnerir at Armscor. In the early 2000's BSL,'BSI confcrred with thc by then ANC contrelled Government ahout its cnmmission claims. En the end. the Officc of the President did not wish to assist and chose to put suppad for recovcry of diveited funds steps on hold,"

More recerrtly. BSL's advisors have found evidence rel:iting to the rolc of KBL in ~tl~e loss of i t? cornmission which has lead to the preparation of ~ Z I C present prclccedin~s in Uclgium and in Portugal. where BSLIRSE have standing from a jurisdrctional point of vicw and where the claims in tort and in

U BSL,iRSI first obtaincd consent from the Sotrth African Government to lnakc available (in camera) to thc Court all relevant documentation on Project Adcnia. followin5 which the action against Arrnscor was instituted in March 1993

111 One o f the early in~tiatives on thc pan of thc ANC Govcrnmenr was to establish a RSA Co~~imission of Inqui ry chaired by a leading South African Judge. Mr. Justice Cameron. That Inqii~iy reaclicd some serious conclusions about the conduct O F the Senior Manapemcnt at Annscor condemning particular individuals in unequivocal tenns

" That stance is also evidcnt f'rotn the position takcn by zhe South African Government ovcr the class actlon litigation currently proceeding beforc the Courts in the U.S.. where victin~s of the Apartheid Regirne are pursuing many of famous global corporations for suitahle remedies on allegation that such corporations knowingly supported and sustaiiicd a Regimc that everynnc knew was engaged in s e r i~us crimes againct hiumanity. This litigation is referred to generally as the Kliuli~inani liti,oation after tliu name of the orsanization acting a s the lead a I)laintiff in that class actinn".

contract arc not time-barred. As part of thrs effort. in the case a g a i n ~ l KBL and inunlbers of its Senior Management, orders will sought in all rele~ant~iurisdictions. including tile W.S.. for the product~on of pertinent witness and documentary evidence from all entities or persons \ill0 were involved".

111. Summary and Questions

To su111 up, according to witness statements of lo rn~cr key employees of Armscor. responsible of osganising the payment channels of covert procurement during the time of the LJN sallctions against l l ~ e Apartl~cid Regin-IC in S o u ~ h Aliica. '' KBL played a fundamental rolc as tlie organiscr of financial back channels in Europc. This is in particular the case, if, as Maltin Steynbcrg saYs.l3 KBL handled 70 % of all the financial transactions iizvolving the Paris based "'Technical Committcc". a covert organisation of arms procurement for Soul11 Africa. Tlse methodology used. is Iatcr to become well k ~ ~ o w n as the standard model of "money laundering": the creation of structures hy forming front companies at off-shore ccnters and opening bank accounts for them (according to Steynberg 8 5 0 ) . ' ~ funneling thousands of transactions through them. in order tn create intrnnsparcncy, occasionally breaking the paper trail by cash transactions:" the goal was, as Steynbe1.g says. to ensure total

I 6 + control ~ v l ~ i l e preserving anonymity. The Annscor personnel itself was merely involvcd through powers of attorney over thcse accounts. Overall. it appcars from these willless statements oS insiders that KBL was one of the main finaincial conduits

17 instrumental to circumventing sanctions, allowing South Africa to maintain its armcd forces effective, to be ahle to combat - as Steynbeg says - "what they (the South African Government) saw as being a fight against a c o ~ n m u ~ ~ i s t inspired uprising"." In efSect, KBL's contribution became crucial for sanctions busting and indirectly contributed to the crimes against humanity conunittcd by the South African Defense Forces - and it was aware of it. as tlle Arntscor operatives indicate. '' Furthermore. KBL apparently was also used lo facilitate sensitive. if not necessarily illegal. transactions like the procurement of hclp and rescue helicopters (the "Adenia ~rqjcct").'" In this context the reproach made against KBL and its senior managers

-

Security Council Resol~zlion N. 4 18/77,

Witness Statement Martin Ste>,nberg, WS-04. N. 15.

Stcynberg. fn. 13. N 26.

idem. fn. 13. N. l h - 22 .

idcm, fn. 13, N. 23.

idern. fn, 13, N . 14.

idem, fn. 13, N. 18.

idem, fn. 1.3, N. 61.

20 idetn. fn, 13. N. :9,

(in particular Gerrnaine ~ ~ n a ~ c r ) ~ ' was that they conspired with the Arnmscor 17

management in "cutting out" commission agents.*- The method, applied in the concretc case. involved obtaining thc coniidencc of Ihe hcad of BSL. Jorge Pinhol, by opening a special hank account to reccive the cornmission." According to steynberg." the role of KBLqs senior staff &.as to calm down Pinhol (sincc his cooperation was critical) while retaining control over the accounl. Thc overall strategy was - according to my instructions - to keep Pinhol ii.om cierting h i s "commercial veto" by intervening with the Portuguese Armed Forces to stop the transaction. As Steynberg clarifies.'' the aim oC the concrete rnancuvers was to cut Pinhof out as soon the operation was underway and could no longer be stopped.

While cutting Pinlzol out 01' his conlmission is not a necessary part of the wider sanctions busting activity of KBL. the two sides of the story arc closely rclated: First, the bank uses the samc modus opcrandi to maintain control over t l ~ c nccouilts fbr Annscor, jusr in case a payrncnt does have to be made: i t ensurcs lhal Pjnhol signs the standard pnwer of attorney to benelit of ~ r r n s c o r . ' ~ Second. the bank ol%icials were acting fillly under instructions of their powerful clicnt Arrnscor. It appears that Pinhol has not becn afforded the necessary infomlation as a bank client. neither during the opening nor during the hrthcr client-hank relationship. nor in the closing or post-closing phase.27 rather. KBL has placed itself in a conflict of interest and has given preference to the by far more pntent client. with which it was involved in illicit dealings sincc years.

Several questions arise from thcsc facts:

2. Questions

13. If these facts are assumed as proven for thc purpose of this Advice:

a) I-Iow is the behavior of KBL in support of its client AI-mscor to bc qualiltied from a legal or a regulatory pojnt of view?

b) How is the beharior of KBI, in relation to its client BSLIBSI between 1990 and 1993 to be assessed from a legal or a regulatory perspectivcr?

3. Structurc of tlie opinion

14. Relating to tllc legal and regulatory issues raiscd by Kl31,'s role in hclping Arnlscor to subvert the LrN sanctions, tlic opinion will first givc an abstract over~ien/ over the

21 idem. f i~ . 13, N. 27 .

!1 idem, fn. 13, N. 5 8 .

: J idem. fn. 13, N. 5 I ff.

?.I idein, fn. 13. N. 53.

" idom, fn. t 3, N. 58 and 60.

l o idem. fn . 13. N. 55. 1 7 idernfi~. 13.N. 5 9 - 6 1 .

status of bank supervisory mIcs. including AML-ruIes. and sanctions reg~dation al thc time of the aclivity (IV. T .). It will go on to analyse the concrete behavior i n view of thcse rules (IV.2.). In a f'urther chapter the analysis mill focus on the treatment of the clients BSLIRS! by the Bank (V.). Again. elements of criminal. civil and adntinistrative responsibility need to be distinguished. A concluding chapter will summarize the considerations (VI .).

1V. The Role of KBL in Helping Armscor Undercut the UN Sanctions

Luxembourg\ rules against sanctions busting, money laundering and on fit and proper conduct o f hankers

Sanctions busting

Sccurity Council Resolution 41 8 of November 4. 1977. was mandatury (in application of Chaptcr VII of the UN Charter). It stated "1J7crf rl7e nccll~isition IF South A f r ' i c ~ ~ ~ ~ f ' a r ~ ~ l . r und r.elarc~d m(rte~.ial con,rtitufes n threnr lo rhe mainfc~?~c/nce of' ir~rert7arinnul peace and secl~rity " ( 1 .). It u7ent on lo declare "ll~ar all S/_r;rores shall ceose forthu~if l~ nnq. pt*o~yisions ;o Sul~th A,fiicn, of anns and rrln/sd mai~rirri qf oii t j ~ t ' s ... and shall cease m I ~ ~ L ' I I fI7e prm-ision qf ... gran/,v qf' J ~ c P I ? s ~ I ~ ~ ~ arrcrngements . . . " (2.)

After the declaration of the State of Eincrgency in Soul11 Africa, the UN with its Security Council Resolution 569 of July 26. 1985. stepped up Ihe sanctions to exclude all new investments or grants to South Al'rica overall. The European Community in a confcrcnce of Foreign Ministers. l~cld in Luxembourg on Septcmhcr 10. 1985. echoed this text and adopted new measurcs. amongst them "n s!ric/(v monitored emhar~qo un lhc L ' X ~ J O P ~ to LSi)~tfh Africu or ~i~ec/ /~onx LIT^^ paramilitcrry eytiipmenl ".

Luxembourg has in a letter to thc Secretary General of thc UN declared that it sub-jected the salc of arms to authorization. 111 its letter of January 9. 1987. it indicated that it would strictly comply with the obligations under Security Council ResoIution 41 8/77 on the anns embargo against South Africa. Whereas somc LTN- Members like Ger~nany have foreseen stiff sanctiolls for the breach of a UN ernbarp." other countries. cspccially financial centers. have enacted laws only late - especially in t l ~ c contest oS the Iraq embargo (Security Council Resolution 661/90) - which since have bccn gradually upgl-adcd." Luxembourg has only indirectly implemented its commitment to international law in criminal IegisIation a1 the time. The Iettes to the SG written by tllc UN Ambassador of 1,uxembourg refers to the export licensing laws. I4uxeznbourgms export licensing law of 1963"" gives the

For Gerrnany cf, Aussenwirtschaftsgesetz (AWG) of April 2 8 , 1961. Siilce 1992 it fbrcsces a sanction o f between 2 - 15 ycars o f emprisonment!

Especially Switzerland. starting off in I990 ~v i t l i a niisdemeanour. ending up in 2003 ~ i t l l a serious offence, entailing up to 5 years of cmprisoninent.

I,oi du 5 aoirt 1963 concernant I'itnporlalion. I'esportation et Ic l t a n ~ i t des marchnndisc.5. Journal Offic~el A - No 45. I0 aodt 1963.

Govcnlrnent the right to anact regulation detailing industrial and other products under import. cxport or transil licensing obligations. The regulation of 1977" also lists helicopters nbovc a certain weight. The omission to obtain a liccnsc is sanctioned by prison (8 days to three years) or a fine. unless special rules of the Common Benelux Market or later the EU applied."2 Additionally thc il~volvement in large scale sanctions busting could very wcll have an impact fron-r a banking regulalory point of view.

Anti-Monev Laundering-Rulcs

It is true, the modus opernndi of KBL i b l l o ~ s - as Stcynherg describes it33 - t11e logic of money laundering: the cxtcnsive use of shell corporatiolls created at off- shore centers. bank accounts opened i n their name or numbered. occasional cash transactioi~s to break the paper trail aiid everything organised by a professional privitege holder. This does not, howcver, mean lhat it constitutes money laundcr-ing in a legaI sense. in particular since the anti-money laundering rules emerged only gradually over time and werc just about to be created at the time discussed here.

Anti-money launderiilg meant from the beginning criminalisation on the one hand (the international instruments typically contain definitions o r the offence and rules on confiscation and mutual Icgal assistance) and preventive. regulatory measures on the other l~and (in particular the identification of clients and beneficial owners, increased diligence in unusual circumstances. notification of suspicion and cooperation with authorities, sound internal organisation oi'financial institutions).

As mentioned, they have been gradually deveIoped in international instruments and implemented at a son~ewlzat diverging pace domcsticalIy in laws, re~ulations and internal company rules.

In Europe, the probably first internatio~lal instrument requesting action by the financial sector to prevent its rnisusc for the "tl-cmsfur. ( ~ f , f i t t d v qf'cri??linni oriCqi)? .$+om Dne coiinrry to crr7o,herw was the Council of Europe's Recommendation No. R (80) 10.'' If the goal was at the time primarily to prevcnt the laundering of funds stemming from "hold-ups and kidnappings" (it was the time of tllc "brigate rosse" in Italy and the "Rote Armee Fraktion" in Germany). the text does not specify crirninal activity when callirlg lbr the coopcration of the banking systcm in the prevention of crime.

A direct lint can be drawn to the next prudential text on the use of financial institutions "for the transfer or dcposit of money derived from cri~nil~nl activity". the "Base1 Statement of Principles" of the "Hascl Cornn~itlee on Banking Supe~.tjisinn" (Cooke Cornmillee) of December 1 2. 1988 (BSP).

RfigIement grand-ducal d t ~ 29 j u i I l c t 1977 remplaqant tn lisle I anncxde nu rkglement grand-ducal d u 17 aoi~t 1963 soulnettant h licence le transited ccrtaines ~narchrtndises. Journal Officiel A - 68. 29 novenil-rre 1977, 1974 ff. (for helicopters cf. page 1983, no. 1460).

I.oi du 5 aofit 1963, fn. 30. article 'I.

COE. Measures against the transfer and the safekeeping of funds nf criminal origin. Kec. No. R (80) 1 O of Junc 27, 1980. preantble. second indent.

Rot11 texts hcus on customer identification. Even if the BSP accepts that a bank may havc no means of knowing of the criminal origin it requests "rt.nsol~ahi~. dforr.r. in determine the trttc idenfily of all czrstamc.~.~" (11 .) and claims that "barrkv shozlld nor sri ozrt tu offir stlr.ili.ces or* prm-idc 0cfi17~ u.c.r.rj.r~ance in trvrnsnciions which ?laedv 1 3 ~ 1 1 3 ~ '

good ren.rons to .sz!pjmse are ussociatud 11.ifh mnn~y-lcrz~~lclering ctc.!iri!itls'' (111. in fine).

Interestingly enough. again the prudential texts do not specify the nature of predicate offence to money laundering. Only later. when through the ratification of thc UN Conven~ion of 1988 by Member States and r l~e 40 Rccommendatio~~s of the Financial Action Task Force on Money Laundcring t l ~ c term ''money laundering" began to obrain a clearer definition in a criminalisation contest. mas it restricted as a n~inimuin to drug related crime. However. as carly as 1990, with thc Convention 141 of the COE. the definition of "predicate offence" was widened again to all or all serious The fi~ll national irnplerncntatior~ of this broadening of predicates, however, took until 1996,jh whcn the FATF insisted that all serious crime was a predicate. An international acceptable definition of whai was considered serious only followed in the FATF Recommendations of2003." or for corruption in 1997.''

It may be added that already tile first of three conscct~tive EC Directives on moncy laundering3" explicitly states that it is essential that Member Statcs go bevond the

4 !5 narrow definition of predicate offencc of the Vienna Convention on Drugs.

Luxembourg adopted a money laundering provision relatively earlq.'' I~owevcr. it refused for a long period to go beyond drug trafficking as a plqedicate offence. and even now. the list of predicate offenccs is ratather incomplete.J' This has been repeatedly cl-iticised in various evalua~ions h!, international organisations. especially by the FATF and the OECD.~'

It is crucial. however, to rccognise that the Lusernhourg self-regulatory organisation, thc "Association des Hanques el Hanquiers du Luxembourg" (ABRL)

COE, Convention on Laundering. Search. Scizurc and Contiscation of the Procecds from Cri~nc. Strashourg. November 8. 299(F, No. 14 1 . All. 6.

FATF 1996.

FATF 2003

OECI). Convention 011 Coinbating Rrihery of Foreign Public Officials in Inicrnational Busincss ~l'ransacticms, November 2 1. 1997. Art. 7.

Of June 10, 199 1 ( L 166/77): December 4,2001 (L 344'76): October 26,2005 ( S 309'1 5 ) .

EC Directive 199 1 , Al. B of the lntroduclion.

Art. X o f the law of July 7 , 1989, modifying the I n w of F e h r u a ~ ~ 19, 1973,

CT. An. 506-I - 0 6 - 5 0 7 code penal: Pit Reckinger, Luscmbourg, in: MuIleriK3lin'Golds~vnrth, Anti- Money Laundel.ing: lnteniational Law and Practice. 2007, 598: Rirnn Adas'Pitrre Krier: Luxemburg, in: Cla~~klBurrcll, A Practitioner's Guide to International Mane? Laundering Law and Regulation. Lolldon 2003. 825.

FATF Evaluation of June 28, 199>, N. 39 W.; OECO Evaluatio~~ of Evaluatinn by the Working Group on Bribery of tlrc OECD of'2R May 2004 (Phase 2) 2 1.44.

had immediately rcnctcd to the BSP in its ethics slandards (rtgles de d i ~ n t o l o ~ i e ) . ~ ' ' 'The supervisory authority. then caIled the "lnstitut Monttairc Luxembourgcois" (IMI,). made it clear that the ohligations to prevent money laundering included thesc best practices and standards of ctl~ics.~' It applied the broad notion of money laundering of the RSP.

2 8 . It is only in the new legislation on the financial sector of April 5. 1993. that the obligations of the finarlcial operators relating tu moncy laundering \tTcre restricted to specific predicate offcnces detailed in tflc drug legislation.4h

c. "Fit and proper conduct"

29. These considerations place the prudential anti-money Iaundering ~t~easurcs in the context fro111 which it originally emerged:'"

30. Already well before 1993 (since the financia! center in Luxembourg took off in the 1970ies4') the fundamental concept. now explicitly contained in the law of. 1993. was in place: banks are under the supervision of the State (formerly the [MIA, now the CSSF). they need a licencc to do business ("un ags~tnenr").J4 Condition for licensing is "l'honorabilitk et I'exp6ricncc professionne1les" (the "fit and proper conduct") of' its board and of its management.'" Apart from criminal and administrative sanctions. disrespect of laws. regulations or serious rnisrnanagen~e~~l by supervisors or top-management can, after having asked t l ~ c inslitution tn remediate the situation, lead to the suspension 01-the individual manages or - in very serious cases - to the revocation o r the licencc."

2. KBL's conduct

31. If it wcre true. as the former employees of Arnlscor suggest. that KBL served as a deliberate conduit for 70 % of the clandestine tradc conducted by the European centraI of Annscor. hidden in its Paris Embassy. opelling and using up to 850 shell corporations. this would be one of the most serious forms of sanctions violation registered so far: togcther with thosc selling the p o d s and thosc serving as clandestine routes for the goods. the financial channel is a fundamental part of the conspiracy to subvert the UN Security Council Resolution 41 8. Concentrating or1 the

Cf. the general standard relat~ng to custnmcr relations of Decembcr 5. 1958 and the implcmentat~on of rhc BCP of January 1989.

IML Circulaire 89/57 of Noven~bcr IS. 1989, 1 (b).

Loi du 5 avril 15193 rclarive au sector financier, Receuil de Legislation. 10 avriI 1993. 462: an. ? R s. 3 : Duan Spielrnann. La rcprcssion du dClit de blanchiment d'argent cn droit lusembourgenis, annalcs du droit lu?tembourgeois. 1993. 166.

Daniel Zuberb(IhIcr, Banken als I-Iilf'spolizisten zur Verhindurung der Geldwascherei? - Siclit e i r ~ e s Bankaufsehers in: Pierh, Bekiimpfung der Gcldw3scherei. Modcllfall Schweiz?. 34 ff.

In the same sense. Expert Opinion Christian Wcycr. 6.

Art. 2. Ioi 1993 (fn. 46).

Art. 7 and 19. loi 1993 (fn. 46)

Ad. 9 ff.. loi I993 (51. 46).

mere exportation of the goods is an incomplete perspective. Clandestine shipment as well as financial backchannels arc palat of xvhar is meant hy the term "sale". uscd by the UN Resolutions.

It is. however, immaterial whether this specific behavior was domestically criminalised: it was clearly illegaI according to international law (Chapter VII of thc UN Charter). It is furthennore immaterial whether it constitutes "money laundering" in a strict legal sense as defined by Luxembourg Criminal t a w of 1989 or Finallcia1 Legislation of 1993: A bank that deliberaiely channels billiolls of Dollars of thcn undoubtedly illegal payments through its systetn does not offer 111e requirements of an "honorable" and "expetienccd" professional. 'I'his is an obt~ious o i l e~~cc against the rule of "tit and proper conducl". Exactly this type of conduct kvas mcant. when the first prudential instruments asked financial centcrs to prcvent the abuse of its tynancial institutions for the transfer of funds of criminal origin. Besides. it is widell, acknowledged that Luxembourg was then and still is tl~rough its special position as a strong financial center particularly -'exposed to reputatinl~al risk"."

In s11ort. there would have been a legal basis and an ohligation of the supen~isors at thc time to intervene with robust sanctions against KBL for its rolc in sa~~ct inns busting, if they had known oftlie extent of its involvement in the illegal activities.

The Behavior of KBL towards BSLIBSl

Turning now to the concrete acct~sations against KRI, and its managers far their behavior towards their clicnt BSldBSI, there is, as indicated. no direct link to the sole of the bank as linancial back channel for sanctiolzs busling. Rut i t seems that t h s bank was ready for all kinds of additional services, if asked for by Armscor. including the "cutting out of agents.'.i3 once they had served their purpose. as a former employee of Armscor puts it. This behavior has to he assesscd under three perspectives:

Civil law

From a civil law pcrspectivc. it will have to be analyscd \vhethcr the basis fnr a contractual or a pre-contractual responsibility of KRI, is given. This analysis has already been conducled in detail for the pLlrposes of possible court action." It is not my task to further examine this option. even though it looks very promising for the Claimant.

Regulatory law

Furthermore, if a clicnt is tricked by a banker colluding wit11 a third patty (who also happens to be a client of this bank) into dropping its "commercial veto'.. in order to

- - -

s1 - - AdaslKrier, fn.42. R,22.

$1 Steynbcrg. fw. 13, N. 5 8

5 I Summons before the rribunal of First Instance of Brussels. dralt Junc 27. 2007

loose the enforceability of a commission payrnenl. this is hardly an expression of sound banking practice. Rightly. the banking expert. CHRLSTIAN WEYCR, analysing the circumstances of thc account opening and management, has put it in strong words:

"Ijipld the siflr~r/ror~ cot~~plr~le(v rir~aoci~p~rrhlr?ji-w~~~ ri hui~kitlgpoin~ of v i rk~ ' ntld C L I I ~ I T O I I ~ I I ~ U ~ T I C J ~ ~ ~

how m7jV cnmnp,e!enf hrmk (71. irs Scnior- .t!~niyetriunr or. its rnrcl-nal or r?rrrr~~cfl nirdilor-a its con~pl~nrrue officer. ~vorrld hm7e 1c.t s ~ w h o sifrtutlon orclv" "

3 7. FIc finds thc ohliga~ion to "fidelity" towards the client ahsolrdely violated.'"'~l~ese are aspects which should have - apart from civil responsibility - given rise to a supervisory i~ltervcntion in Luxcmbourg.

3. Criminal law

3 X. Slightly more c o ~ r ~ p l e x than the c~ns idcra t io~ l based on regula~ory Iaw is thc assessment according to Luxembourg criminal law. The most lilicly possibility is that the behavior of hank staff arnountcd to Ihe defrauding of Jorge Pinhol and BSLIBSI.

a. Fraud?

39. Under most legislations it would conslitutc a fraud lo trick a person into dropping a commercial security and thereby Iosing chances of ef'i'ectually erllbrcing dues owed from a contract." The Luxemhoul-g Iaw is. however, closely modeled on Belgian

5s and the old version of French law. The Luxcmbourg Criminal Law on Fraud (Ad. 496 code penal. cscroqueric). essentially sets t h e e rcquirements:

- it requires qualitled "manoeuvres frauduleux" by Ihe author.

- the "delivery" of funds or ub-jccts by the victim,

- finally the author nlust pursue the goal of appropriating himself of an object helonging to a third party.

aa. Manoeuvres frauduleux

40. The term "manoeuvres frauduleux" relates to an intensive form of manipulation going far beynnd simple lics." The "manoeuvres" have to prcdare the "delivery of the funds". In our case. the intensive efforts of hanks staff to convince the claimant that he merely needs to npcn the account in order to be paid. the procurement of an unusual power of attorney as well as thc unfair behavior after having opened thc account in conspiracy with A~~ITSCOI' stal'f, goes far beynnd sirnplc insincerity. Such behavior would typically bc co~lsidercd as '.mnnocuvres frauduleux".

$ 5 - Expcrt Opinion Christian Weycr, 8,IO.

5 I, Idem fn. 55 .

57 Cf. Art. 146 Swiss Criminal Code: Para. 263 German Criminal Code.

5 X For IlistoricaI detai ls c f . Alphonse and Dean Spielmann, Droit Penal General Luuembou~geois. Bruxel les. 20132, 8 ff.

<l)

I,ux. Court de Cass. 19, fivrier 1973, p. 22. 290: 2 5 . juin 1087, p. 27.75. cf. also nncien code penal franqais annoti. N. 53, 4 . 55 to Art. 405 CP.

hh.

41.

CC.

42.

dd.

43.

ee.

44.

Delivery o f values"'

It is fundamental for the understanding of fraud that the victim damages himself by delivering the goods or. as it says in the text of the Luxembourg law. t f ~ c values to the author of the crime. It is a difficult question. based on the published case law in Luxembourg, to determine whethcr the giving up of a "commcrcia! veto" can be describcd as "'se faire remettre ou ddlivrcr des fonds, meubles. obligations, quittances. decharges": i t could wcll amount lo undeserved form of "dCchargc" of the debtor to let go of secz~rities. In our context the commercial velo is fundamental to the enforceability of this confidential commission.

"Dans le but dc s'approprier une chose appartcnante ;i autrui"

The goal of tlie operation was without doubt to inflict damage which corresponds with an illegal benefit on the side of the trickster. llowcver. Luxeinbourg law demands. different. e.g, from German law, hut in line with Belgian law. more than just the goal to enrich oneself at the cost of thc victim. The autlzor is expected lo appropriate an object. It is a moot point if manipulation in order to obtain a service Sor free c\lould ~ u f f i c e . ~ b b v i o u s l ~ . if the authors of the crime ate succcssf~il. they have made the agent work for thein lor free. However. in such a case the victim is not really defraudcd of a service. rather of its remuneration: through his manipulations. thc author has managed to trick the victim into giving up its commercial securiiies and thc chances oi' obtaining payment. Thc ob,iccl, the victinl is intending to appropriate is the payment. And thcse are hnds helonging to others.

The opening of the bank account was a key-par$ vi'the sclleme to manipulate. the bank managers contribution was necessary to commit the crime: therefore the bank inanagcrs are co-authors with the Arrnscor representatives according to Art. 66 s. 3 code pknal Lux.

The criminal statute of limitation for '"eincs cozrectionclles" according to Luxembourg law is merely -3 years." 21t i s unlikely that thc procedures in South Africa or in France have been able to interrupt the flow in these delays, since they were mere civil proceedings. I-lowcver. if a future court dealing with civil clain-rs against KBT, (be it in Luxembourg ur any other placc likc Belgium) should come to the conclusion that KRL stai'f harfe defrauded the BSI representative. this aspect would constihi~e the basis for a separate tort claim. If l,uselnhourg law is applicable it cvould subject to the long. civil law tort prescription of30 years.

6n ,.La rcmisc". cf. ancien code pkna) frangais annolC N 39 to Art. 405 CP.

hl Negative ttlc Court d'Appel Lux. 7 . dCcemhre 1993: ..La presta~ion de scrvice ne coilstitue pas un Clenlcnt constirutive de I'escrnt~ueric qui ne vise que l a reinise ou Ia dklivrance d'ob-jets mobil~is": under old French law. which corre~pondcd to the Luxembourg test, dissenting opinions can bc found : Uaurt d'Appel dc Paris 2 5 . mai 1989, Dr. pen. 1990. p. 0: TGI 1,yon 1s. jui11 1970, IUI' 1970 I1 16514; RSC 1971 , p. 119 {dkcision ci-jointe).

"' Art. 14 and 638 code penal Lux.

V1. Cenclusion

45. If the allegations by former Armscor employees, the entity owned by the South ASrican Gover~llnenl encharged during h e time of the Apartheid Regime with circun~venting the Arnls embargo of the UN. are coi-recl. KBL was one of thc primary clandestine financial conduits for the Paris based i l lcgal procurement operation. It was responsible for up to 70 % of the covert tinancing of arms deaIs. making usc of an entire system of 850 shell corporations and corresponding accounts.

46. Sanctions busting went against intcrnationnl law (Security Council Resolution 41 8 in combination with Chaptcr VII I,rN Charter). 1,uxcmbourg shared this view and promised the UN to enforce it through its export licensing system. Financing. just as much as providing back channels for goods clearly werc part of the conspiracy. but they secrned to elude thc control network of European counlries. Yet. for a bank to hc one of the corncrstones of undermining the sanctions against an entire country is a yery serious matter. Evcn if i t n,ould not have directly contravened against the criminal provisions of a specific country at the time. running hundreds of shell corporations at clandestine accouurs ro subvert the sanctions was clearly not what onc would call professional behavior of a serious finaiicial institution. Even iS Luxembourg codified the considerations of "fit and proper conduct" by bankers in detail, only in 1993. these rules werc in place Iong beforc. Under these circumstances. if the supervisory authorities would l~avc known of the behaviour of KRI,. they would or should have intervened with the strictest of measures available.

47. KB1, was a very probleinatic bank indeed. This impression was contirn~ed by tllc way it treated i~~dividual clients when a conflict of interest arose: I t is no coincidence that it apparently lent itself to participate in a fraudulent scheme arranged by Arrnscor to trick an agent out of the security (commercial veto). impeding him from enforcing his claims to a commission.

48. If the conspiracy of bank employees with Arrnscor (in opening. running and closing the account) against mother client was problematic from a prudential point of view. it most probably is thc basis of contractual and pre-conclractual tesponsihility (an issue not examined in depth here). It is fi~rther reinforced by an additional tort claim. based on a criminal fraud charge. a real possibility. even i f some technical difficulties duc to the peculiarity of I,u?cernbourg Ian' may nccd to be surmounted.

49. Overall, KBL is. if these allegations arc true. a serious reputatinnal risk factor and a liability for n financial centcr like Luxembourg. The past nccds to be rectified as soon as possible.

Prof. Dr. Mark Pieth