The Arms Fixers

Chapter 8

The USA: Getting Around the Toughest Law

When it comes to arms control, the United States of America is sometimes a paradox. Loose legal controls on domestic gun sales and ownership in the USA facilitate a steady flow of small weapons smuggled across the borders, particularly into Mexico.¹ However, a relatively tough US law on international arms brokering was introduced in March 1998. It requires any US citizen, wherever located, and any foreign person located in the USA or subject to US jurisdiction,
engaged in the brokering of arms, to first register and to obtain prior written approval for each proposed transaction. Registration and licence approval must be obtained from the Office of Defense Trade Controls of the US Department of State. These
requirements are set out in the Arms Export Control Act and related regulations, the International Traffic in Arms Regulation and the Munitions List. The latter defines what are termed ‘defense articles’.²

The enforcement of such controls is primarily the responsibility of the US Customs Service. US Customs special agents receive training to investigate criminal cases of smuggling, money laundering and the application of relevant US regulations, notably at the Federal Law Enforcement Training Centre in Glynco, Georgia. Such agents have extensive powers of investigation and can obtain comprehensive search warrants to seize documents, computers and other materials from business premises and homes. Permission must first be granted by a US district court on the basis of a convincing
affidavit presented by the customs agents.

The US Export Control Enforcement Unit of the Criminal Division in the Department of Justice reported that, between January 1981 and December 1998, there were 387 ‘significant’ export control cases in which defendants were indicted for suspected violation of US arms trafficking and sanctions regulations, 170 of which were for violations of the Arms Export Control Act.³ Not all of these cases have been resolved or have resulted in a verdict of ‘guilty’. The frequency and seriousness of the cases have also varied greatly. Some ‘significant’ cases on the official list, such as smuggling Cuban cigars, would appear trivial. Most cases have been related to US trade and military sanctions against Iran, followed by Bulgaria, China, Cuba, Iraq, North Korea, the USSR, Russia, South Africa and Yugoslavia, while a minority of cases have
involved the failure to secure and use valid export licences for military equipment
exports to non-embargoed countries.⁴

One trend has been the growing number of cases involving illicit trafficking of light weapons, small arms and ammunition – from only two explicit cases in the fourteen years from January 1981–December 1994, to twelve cases in the four years from January 1995–December 1998. All but one case concerned countries in Central or South America. Most principal offenders received sentences of around 30 months’ imprisonment.

US Sting Operation

US Customs agents have realized that they need much greater exchange of information about arms brokers in other countries, as well as the judicious use of undercover ‘sting’ operations, to be able to crack the increasingly global crime syndicates.

In March 1995 a broker in Florida met with a Lithuanian national of Russian origin, called Alexander Darichev.⁵ The broker explained he was a member of a Colombian drug cartel, and was looking for sophisticated weaponry. Darichev presented himself as a broker of weapons and weapon systems, with contacts in government agencies in Russia, Lithuania, Bulgaria and elsewhere. Representing a company, Armimex, in Bulgaria that was apparently licensed to manufacture Russian weapon designs, Darichev offered a whole range of weaponry, from automatic rifles to shoulder-launched surface-to-air missiles. The client showed an interest in the Russian anti-aircraft missiles, including Strela 2M, Strela 3M and Igla systems, which are designed to destroy low-flying airplanes or helicopters. If the deal went through successfully, Darichev and a partner of his, Aleksandr Pogrebezskij of Lithuania, hoped also to be able to procure nuclear warheads.

During several meetings in the following months between the broker and Darichev, a complex mechanism was set up, using front companies and government officials on both sides of the Atlantic. The Lithuanians wanted the deal to look legitimate. In Florida, the agent of the Colombian narcotics traffickers set up a company called Phoenix International. In April 1996, one year after the first meeting, the US-based broker went to Russia to examine the weapon systems. In the following months, a company and several bank accounts on the Isle of Man were opened, in order to
facilitate the financial end. The value of the missile contracts totalled over $3 million; upon delivery of two sample missile systems, a first payment of $50,000 would be made. The money was then to be channelled through a US account at Prudential Securities in the name of another company, Alita Corporation.

In December 1996, Pogrebezskij instructed Prudential Securities in Florida to transfer the money to New York. Two days later, $49,800 was transferred from Prudential
Securities in New York to Snoras Bank in Vilnius, Lithuania. The Lithuanians had
arranged for the transport of the missiles, through the services of Angelo Zeini, the Cypriot owner of merchant ships who had offered his vessel, the M/V AI Fares, to smuggle the missile systems into the USA. Zeini would send the ship to Bulgaria to pick up the weapons systems and use false paperwork, provided by the Lithuanians, indicating that the ship would be transporting 15 forty-foot containers of machinery and general cargo to Puerto Rico. One container, with the missile systems, would be commingled with the others in order to pass inspection at the Straits of Gibraltar.

Because Armimex could sell these kinds of weapons only to governments, Darichev and Pogrebezskij arranged to acquire an end-user certificate from the Republic of Lithuania, signed by and bearing the seal of the Lithuanian Minister of Defence. The client was also reassured that if the missile systems were to be used, they could not be traced and that the Lithuanian Ministry of Defence would issue a false letter of receipt upon delivery of the weapons in Puerto Rico.

In July 1997 the negotiations came to an end. At a meeting in a hotel in Miami, US agents arrested Pogrebezskij and Darichev. What the Lithuanians had not realized was that their US brokers were not representing Colombian narcotics traffickers: they were undercover US customs agents from Miami, exposing the first credible post–Cold War plot to smuggle tactical nuclear weapons into the USA. The customs agents had wanted to continue their investigation up to the point of actually purchasing the
nuclear devices, but only the missile part of the deal had been permissible under US national security regulations.

After his arrest, Darichev cooperated with the US District Court Attorney and made monitored calls to the Bulgarian company Armimex confirming that 40 shoulder-to-air missiles were indeed waiting to be shipped to Phoenix Arms International. The US Justice Department also determined that the Lithuanian Minister of Defence had in fact signed the end-user certificates. He later resigned. Darichev and Pogrebezskij were convicted on charges of smuggling, money laundering and conspiracy. As in many such prosecutions in the United States, they were given only a four-year
sentence in a federal penitentiary. Some would argue that such a comparatively light sentence does not set a strict enough example to other would-be arms dealers.

Exploiting the NATO Weak Link

Arms brokers and shipping agents based in the United States use the privileged status of NATO partners as a weak link to forward arms to prohibited destinations. In April 1998, the US State Department threatened to revoke all export licences for firearms to countries of the European Union because, it was claimed, thousands of high-powered, semi-automatic US pistols and rifles sent there were being re-exported to places such as Algeria, Turkey, former Yugoslavia and countries in Central Africa.⁶ Foreign purchasers of US arms are required to sign a statement that they will not re-export the items without the prior authorization of the US State Department, but this is not recognized in EU law as long as the re-exporting remains within the EU.

US officials claimed that the tough laws restricting domestic gun ownership in countries like Germany and the UK mean that large imports of small arms from the USA inevitably go elsewhere, some ending up in conflict zones and amongst organized criminals. In April 1998, German traders had licences pending for 84,399 US handguns, French traders had 22,660 and Italian dealers had 18,803.⁷ It seems highly
unlikely that all these weapons were intended for domestic sales.

Germany, for example, was accused of being a staging post for smuggled small arms in former Yugoslavia and Turkey. Britain’s largest export-licence destinations for small arms in 1997 were the United Arab Emirates, Oman and Qatar. These countries are well-known transit points to Iran, Iraq, South Asia and Africa. US officials
accused traders and brokers in northern EU countries of transiting US small arms to Greece, Italy, Portugal, and Spain, which have long sea borders that are difficult to police. Historically, well-developed smuggling networks exist amongst the Mediterranean countries and islands, and also between the Mediterranean and Latin America.⁸

However, official US complaints about the weak export regulatory systems for arms traders in the EU states need to be viewed against the willingness of the US authorities to grant export licences for small arms and related items to many countries where these items are used for serious violations of human rights. Since most applications by US dealers for export licences covering small arms involve relatively low monetary values, the US Congress does not have to be notified of them in advance. Thus, for example, when Congress received in 1996 the annual State Department report on
human rights violations in Bahrain recording the security forces’ use of live ammunition against pro-democracy demonstrators, US licences were quietly being issued for 35,844 pistols and revolvers to go to Bahrain.⁹ According to a report commissioned for the UK Defence Manufacturers Association, procurement of security equipment for the Bahrain forces is usually made through the UK Crown Agents company. Bahrain is also ‘the Gulf’s busiest entry and exit point’ and was suffering from a rising wave of illicit trafficking, where it was possible to register ‘brass plate’ companies, tax free and with no physical presence. ¹⁰

Back to the High-tech Future

In September 1999, a US Federal Bureau of Investigations conference of law
enforcement officials in Germany was told by experts that future international organized crime syndicates will use cutting-edge technologies and not only old-fashioned guns and brute force. There will be an increasing demand for electronic, chemical, biological weapons that are easy to carry, silent, hardly visible, and whose effects are harder to trace.¹¹ In 1998, Interpol issued a warning to 177 countries after a 3-inch long key-ring pistol, made in Bulgaria to kill at close range, was found being smuggled into the UK at Heathrow airport; ¹² in 1999, Spanish authorities arrested four people and seized an illegal arsenal in Lloret de Mar which included 600 ballpoint-pen pistols, miniature guns hidden inside pen cases. ¹³ US customs officers are already alert to cases of smuggling small military and security equipment that is not necessarily classed under old-fashioned firearms regulations.

One case is that of Yuri Montgomery (also known as Yuri Malinkovsky), who had links to former Yugoslavia and ran a company called Fortend USA.¹⁴ Montgomery pleaded guilty in the District Court of California in November 1996 after a customs investigation found that his company had illegally exported ammunition, laser-gun sights, night-vision goggles, electro-shock weapons, tear gas, double-lock handcuffs and military helmets from the USA to clients in Macedonia and Slovenia. Fortend USA had sent the equipment without obtaining valid export licences. It is believed that some of this may have ended up in Serbian hands since torture with such shock weapons began in Kosovo. ¹⁵

US regulations have allowed some types of security equipment to be exported to NATO states without needing prior approval, and this has also attracted brokering networks. On 29 March 1991, a US cargo company, Elite Worldwide Services, shipped 150 electro-shock riot shields for a US trade company based in Pittsfield, Massachusetts, called Protech Armor Products. The latter firm was closely linked to another private company, Custom Armoring Corporation, and specialized in ballistic materials and police equipment. The shields were made by Nova Technologies of Texas and bought by Protech before being flown by air to Heathrow Airport, London. It was part of a well-planned trafficking operation to export the shields to the
Romanian Ministry of the Interior via London, Paris and Luxembourg. Alphasafety

SA, based in Luxembourg, was the brokering agent for the Romanian government. But after a crate of the shields arriving at Heathrow accidentally fell off a truck and broke open, UK customs officers began investigating the matter. They contacted their US counterparts, and the carefully planned operation started to unravel.¹⁶

Elite Worldwide Services attempted to gain the release of the shields from UK customs by obtaining help in the UK to falsify a US Commerce Department document, describing the shields as ‘kevlar vests’. Shortly afterwards, William McNeil, Vice President of Protech and Treasurer of Custom Armoring, who was responsible for day-to-day operations, began to arrange for a second consignment of 150 electro-shock shields from Nova to be flown to Romania via Houston, Paris and Luxembourg. They conspired with Herbert Allen of Nova Technologies, as well as Charles Dye of International Business Connections, the US representative of Alphasafety, to deliver the shields using a false Shipper’s Export Declaration, a Shipper’s Letter of Instructions and an Airway Bill. These documents indicated that the ultimate end-user would be Alphasafety, so that the destination could be presented as Luxembourg, a NATO member and therefore exempt from licensing requirements for such items. Around 12 May, the shields were exported unlawfully to Romania, via Luxembourg.¹⁷

Both the US and successive UK governments have refused to divulge the name of the UK broker/s and US supplier/s who were issued licences for a large consignment of such weapons to Saudi Arabia, a state with an appalling record of officially-sanctioned torture. The UK marketing agent for Nova, International Procurement Services (IPS) based in London, was also a brokering agent for the UK small arms company, Royal Ordnance. In 1995, Phillip Morris, a salesman for Royal Ordnance working with IPS, admitted to assisting the supply of 8,000 electro-shock weapons to Saudi Arabia in 1990 as ‘a sweetener’ for the massive Al Yammamah arms deal, the largest in UK history.¹⁸ The fact that electro-shock torture was carried out in Saudi Arabia was never considered. IPS and Royal Ordnance, part of the UK-based British Aerospace Group BAe, offered in a letter to supply more such weapons to the Middle East using suppliers in the United States and Germany. The UK authorities declined to prosecute them for illegal possession of such weapons.

Successive UK governments have since admitted that trans-shipment licences were issued for US electro-shock weapons to be delivered via the UK to Saudi Arabia, Egypt and Botswana, but have refused to divulge the name of the trans-shipping agent/s. The current UK government has claimed it had ‘problems with computer databases’. The US government has also refused to divulge the names of the supplier and shipping agent in the deal, on grounds of commercial confidentiality.¹⁹

‘Drop Shipping’

To broker the sale of small weapons outside the NATO countries, US dealers need to use more devious methods. ‘Drop shipping’ is one such method discovered recently by US Customs officers. In December 1997, Jack Baugher and his company, S&J Products and Services, were convicted of exporting powerful liquid pepper (Capsicum) gas sprays without export licences to Sweden, Canada, France, Germany, Mexico and the Philippines.²⁰ They were also convicted of exporting high-voltage electro-shock stun guns to Russia, Mexico, Indonesia, Guatemala, the Philippines, Papua New Guinea and other countries. ²¹ S&J Products and Services described itself as ‘a manufacturers’ representative’ specializing in security equipment sales, and had advertised in international trade journals.

A former employee of S&J said it acted as a ‘drop shipper’ for numerous other companies, describing the process thus: ‘For example, XYZ company [in a foreign country] will receive an order for pepper sprays and stun guns from ABC company [also in a foreign country]. XYZ company will then ship the order to S&J Products and Services who fills it, creates invoices which reflect that XYZ company is the supplier, and then ships the order to the ABC company.’ The former employee told the court that between 10 and 20% of the business of S&J Product and Services ‘is through these drop shipments’.²² In order to circumvent US export regulations, and therefore to create the impression that the foreign (XYZ) company was the supplier, S&J Products and Services staff carefully created ‘dual invoices’ for each order – one factual invoice reflecting the actual names and amounts of the ordered weapons in order to claim payment, and one fraudulent invoice for sending the weapons.

In May 1996, US Customs had discovered a S&J consignment of pepper sprays and stun weapons on its way to Russia described as ‘Key chains, Pen Units, fountain pens, jogging weights, mini Elect volt unit, electrical volt unit, Book, portable door lock, First aid kits’. A former employee said that in December 1996, twelve cases of pepper sprays valued at approximately $9,000 were shipped to the Philippines via United Parcel Service and All Flags Freight Forwarders. Two other informants said a Philippines company was negotiating a large order from S&J to supply the Philippines police.

The future ramifications of such ‘drop shipping’ arrangements gradually became clear when it was revealed that S&J had obtained its stun guns from Korea and Taiwan.²³ Stun-gun manufacturers in Taiwan have production facilities in mainland China and are seeking to dominate this market in a world where the security forces of over one-third of the world’s states – and most importantly China – practice electric shock torture. ²⁴ S&J were unwittingly positioning themselves as a third-country broker for this torture market. ²⁵ Ex-employees said that S&J had made a special study of export regulations. One confided: ‘it is a long standing joke within the office of S&J Products and Services that they falsely describe the products that they export.’ ²⁶

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Preface / Acknowledgments / Introduction / Chapter 1 / Chapter 2 / Chapter 3 / Chapter 4 / Chapter 5 / Chapter 6 / Chapter 7 / Chapter 8 / Chapter 9 / Chapter 10 / Chapter 11

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25/11/1999 - NISAT