Closeup/Politics

A scandal revisited

CANDU Canada didn’t look evil. Just dumb

Ian Urquhart November 28 1977
Closeup/Politics

A scandal revisited

CANDU Canada didn’t look evil. Just dumb

Ian Urquhart November 28 1977

A scandal revisited

Closeup/Politics

CANDU Canada didn’t look evil. Just dumb

Ian Urquhart

It was Christmas, 1974. Three men gathered in the offices of the president of Atomic Energy of Canada Ltd. to have their pictures taken. The atmosphere was deep and crisp and even and the three men were smiling. Lorne Gray (right), the president of AECL, was smiling because he had sold a Canadian nuclear reactor to the Korean Electric Company. Min Choong Shik, head of KECO, was smiling because he had bought it. And in the background, Shaul Eisenberg, a mysterious Israeli businessman was smiling, possibly in contemplation of his

enormous finder’s fee. It would be two years before the smiles disappeared and Canadians, who didn’t know a reactor from a refrigerator, would be confronted with one of the biggest scandals in the country’s history.

The scandal broke when the auditor-general, parliament’s watchdog of government spending, reported that AECL, the government’s nuclear agency, had been paying out millions of dollars in “agents’ fees” to secure the overseas sales of its reactors. Eisenberg was one of the agents. In understated accountant’s jargon, the

auditor-general, James J. Macdonell, reported that the documentation supporting these payments was “inadequate.” Reading between the lines, the implication was clear: the money was used to bribe foreign officials to grease the sales. Suddenly, Canada had its very own Lockheed scandal.

That was one year ago. But the scandal was never really pursued to its ultimate conclusion. At first it was front-page news, a parliamentary committee began an investigation and the RCMP was called in. But, after the initial burst of activity, the enthusiasm of the press soon faded. The parliamentary committee botched its investigation and neither was helped by the collective stonewall built by the key actors in the affair. The government, for its part, seemed content to rely on the RCMP. And the RCMP encountered problems because much of the information lies outside the country. The foreign governments involved seemed more interested in covering up the scandal than exposing it. Thus much of the AECL affair remains a mystery. But it is possible to piece together most of the story from the public record and confidential interviews. The picture that emerges is not so much one of ugly Canadians corrupting the Third World as of naïve Canadians being taken in by highflying hucksters.

The story begins on March 21, 1968, when AECL announced it was taking over responsibility for overseas sales of the CANDU reactor from Canadian General Electric (CGE). CANDU (an acronym for Canada deuterium uranium) was widely acknowledged within Canada as a superbly designed reactor, one of the country’s few notable technological achievements. The government was anxious to sell it abroad, both to justify the public investment in its development and to announce to the world that Canada could make things as well as dig them out of the ground.

But CGE had not been successful in marketing CANDU internationally. For one thing, it was running into competition with its parent firm in the United States, which was trying to sell its own, American-designed reactor, AECL, the Crown corporation that had developed CANDU at its Chalk River, Ontario, laboratories in the 1950s, took over responsibility for selling it.

AECL was ill-equipped for the task. It was primarily a research agency staffed by scientists and engineers. Its competitors, chiefly Westinghouse and General Electric in the United States, had huge sales staffs and years of experience in marketing reactors. But AECL did have J. Lome Gray, its president, who was immensely proud of CANDU and eager for international recognition for the reactor. Perhaps too eager.

Late in 1968, soon after AECL had assumed its new responsibilities, Israeli Shaul Eisenberg visited Gray’s Ottawa office, praised CANDU and said he could sell it to South Korea. Gray was flattered but skeptical. How could this fast-talking

stranger pull off a sale to South Korea, especially after Westinghouse had just sold a U.S.-style reactor there? Gray told Eisenberg to go ahead and try. A meeting was arranged in 1969 between AECL and Korean officials. It was subsequently canceled by the Koreans, at the behest of Westinghouse and the U.S. government, Gray suspects.

A series of similar disappointments followed as AECL attempted without success to peddle CANDU to Mexico, Brazil, Australia and Romania. As the failures mounted, AECL began to come under increasing pressure at home. Gray, says one ex-staffer, became “desperate” to sell a reactor abroad if only to prove that CANDU was worthwhile.

The opportunity came in 1971. Argentina was once again shopping for a reactor and “we were a little gun-shy and hesitated,” recalls Gray. But AECL had a partner from an earlier Italian venture, Italimpianti, a Genoa engineering firm with good connections in Argentina, AECL and Italimpianti decided to bid for the Argentinian contract together, with Italimpianti handling the marketing end of the deal and AECL the technical aspects. There was one catch, stipulated by Lucien Sicouri, Italimpianti’s extravagant president: an agent would be retained, AECL would be required to pay half his fee—with no questions asked. Gray agreed and the bid went ahead.

In 1973, after beating back stiff competition from Westinghouse, AECL and Italimpianti were awarded the Argentinian

contract. (The terms were ridiculously favorable to Argentina, including a $ 129million loan supplied by the Canadian government at subsidized interest rates. Two years later, it became apparent that AECL stood to lost $200million on the deal. AECL pleaded with the Argentinians to renegotiate the contract and they agreed, but only after the Canadians provided another $25-million loan at subsidized rates. Now AECL stands to lose only $130 million on the deal.)

By this time, the South Korean deal had

warmed up and Eisenberg reappeared in Gray’s office some time in 1972. Eisenberg was clearly anxious for AECL’S business, offering free television sets to the Crown company’s marketing officials (they refused) and crates of oranges from his Israeli groves to Gray (he accepted). In November, 1972, Gray hired Eisenberg as AECL’S “exclusive agent” in South Korea. Eisenberg was given carte blanche with no terms of reference. Even his fee was left up in the air as Eisenberg preferred to settle such grubby details later. Within two years, AECL had sold a reactor to South Korea. (Again, a government-subsidized loan was required, this time for $330 million. It is not yet known whether AECL will make money on the deal.)

With the whiff of success still in the air, the bills started to come in. First, in January, 1974, Sicouri wrote Gray asking for $2.5 million in U.S. currency as AECL’S half-share of the so-called “agent’s fee.” The money was to be deposited in a Swiss bank in Lugano in the account of something called the Intercontinental General Trading Establishment of Schaan, Liechtenstein. This was a dummy corporation owned by the bank. Gray balked at first, then paid the amount in April, 1974, with no questions asked.

In December, 1974, with the Korean deal completed, Eisenberg told Gray it was time to discuss his fee. He wanted $40 million. Gray was stunned. He managed to talk Eisenberg down to $20 million. Gray signed the papers agreeing to the payment on December 30, 1974, the day before he retired.

Eisenberg’s bill for $20 million arrived in January, 1976, on the desk of John Foster, Gray’s handpicked successor as president of AECL. Foster knew the bill was coming but he had second thoughts about paying it after it actually arrived. The summer before, the Lockheed scandal had broken in Washington.

(In August, 1975, Lockheed Aircraft Corp. had revealed, under pressure from a U.S. Senate committee, that it had paid out $22 million in bribes, mostly disguised as

agents’ fees, to secure overseas sales of its planes.)

After sitting on the bill for a few weeks, Foster reported it to his newly appointed chairman, Ross Campbell, who had been brought home from his ambassador’s post in Tokyo to try to straighten out the Argentinian mess (the potential $200-million loss) left behind by Gray. Campbell went straight to Alastair Gillespie, the minister responsible for AECL. It was decided that Campbell should go to Israel to try to get Eisenberg to agree to a lesser sum and to account for his expenses. Campbell went to Israel March 2-3, 1976, and bargained Eisenberg down to an $18.4 million fee, but at the cost of agreeing to hire him again as an agent on any subsequent reactor sales to South Korea. He also obtained from Eisenberg an accounting of his expenses. But the accounting was actually no more

than after-the-fact invoices from three companies associated with United Development Inc., Eisenberg’s firm.

It was these invoices that caught the eye of the auditor-general’s staff when it began looking over AECL’S books as part of a routine annual inspection in May, 1976. Had the sum of $20 million simpíy been paid and noted in AECL’S books as a commission on the Korean sale, “I do not think I could have challenged it,” said Macdonell months later. But the suspicions aroused, the auditor-general’s staff decided to reopen the books on the Argentinian sale as well to see if there had been any similar payments involved. It turned up the $2.5million payment to a Swiss bank. When Macdonell told Campbell and Foster they would have to produce more satisfactory documentation to support these payments, AECL went into a panic.

Campbell and Foster tried frantically to get more information from Eisenberg and Sicouri, to no avail. Eisenberg offered to let Macdonell inspect his books, but the offer was conditional on the auditor-general keeping his findings secret. It was a condition that Macdonell, as a servant of parliament, obviously could not accept.

In an effort to persuade Sicouri to talk, Campbell and Foster drafted Lome Gray back from retirement to reason with his old Italian partner. Gray, Campbell and Foster talked to Sicouri over a three-hour-long

dinner at Montreal’s Chateau Champlain Hotel. Sicouri was charming, as usual, but refused to name the agent in the Argentinian deal.

As a last resort, Campbell tried to persuade Macdonell to drop questionable payments from his report to parliament. The publicity could, Campbell suggested, ruin AECL. Macdonell replied that it was his duty to parliament to report what he had learned, which he did on November 22, 1976. As Campbell had feared, the disclosure of the questionable payments, which occupied just 2'A pages in Macdonell’s 630-page report, transfixed the attention of reporters and politicians alike.

But the issue soon dropped from sight. First, reporters ran into a stonewall in their efforts to interview the principal characters. Eisenberg and Sicouri simply refused to be interviewed. The parliamentary committee, with the Liberals and Conservatives bickering over how best to handle the investigation, dragged its feet.

Committee chairman Allan Lawrence, the former attorney general of Ontario, tried hard to pursue the investigation on his own, but with little success.

Because of the stonewall, several key questions remain unanswered in the AECL affair:

• Who got the $2.5 million sent to the Swiss bank as part of the Argentinian deal? Only Sicouri and the recipient know for sure. Gray insists he doesn’t know, and, if he doesn’t, no one in Canada does. It has been disclosed that the $2.5 million was quickly

transferred from the bank in Lugano to an account code-named “Opera” at another bank in Geneva. But Swiss authorities have resisted efforts to reveal the identity of “Opera.” Italimpianti also deposited $1.5 million in the same account in two different payments. Another million was deposited in a Luxembourg bank account by Italimpianti in six different payments in January', 1975, to complete its half-share of the “agent’s fee.”

• Assuming that the payment was actually a bribe for an Argentinian official, who was paid off? The Argentinian press, presumably on the basis of leaks from the military government in the country, has pointed the finger at Jose Ber Gelbard, the former minister of economics in the Peronist regime, overthrown in a coup in 1976. Gelbard died in exile in Washington in October this year. Before his death, he denied he was the recipient of the alleged bribe. He was a business partner of Sicouri’s in a previous deal in Argentina. But Gelbard only became a minister after the decision had been made to purchase the CANDU reactor. There is also a possibility the money went to someone at Italimpianti or even to a Canadian as part of an embezzlement scheme. That possibility prompted the Canadian government to call in the RCMP in the first place. But the Swiss banks deny the recipient was either a Canadian or connected with Italimpianti.

• What happened to the money paid to Eis-

enberg? AECL officials keep insisting there is no proof that any of the money was passed on to Koreans in the form of bribes. That is true enough, but it is a see-no-evil approach that strains credulity in South Korea, where President Park Chung Hee is said to rule with an iron hand and sticky fingers. And a natural target for a bribe would have been Min Choong Shik, the former president of the Korean Electric Company. Min is said to be a friend of Eisenberg.

• Was Gray duped? There are suggestions that Gray paid far more than he had to in order to grease the sales of CANDU. In Argentina there was already considerable interest in CANDU because it uses natural uranium as a fuel, unlike the U.S.-style reactors which use “enriched” uranium. There has also been speculation that militarists in Argentina wanted CANDU because it produces more plutonium as a byproduct than American reactors. Plutonium is used to make atomic bombs, coveted by some generals in Argentina, which is caught up in a deadly arms race with Brazil.

• Was Gray acting on his own? The former AECL chief insisted before the Public Accounts Committee that he kept both cabinet and AECL’S board of directors fully in-

formed of his arrangements with agents and acted with their approval. But Donald Macdonald, the minister responsible for AECL throughout most of the period, says Gray merely told a cabinet committee “en passant” that agents would have to be hired. And George Gathercole, former chairman of Ontario Hydro and a senior member of the AECL board from 1966 to the end of 1974, says he cannot recall ever hearing Gray mention Eisenberg’s name or agents’ fees amounting to millions of dollars. The board’s minutes show that Eisenberg’s name was mentioned—for the first time—at a meeting in February, 1973. But that was several months after Gray wrote to Eisenbergsaying: “1 have recommended to my board and they have agreed to your appointment as the exclusive agent of AECL ...” Gray insists the Eisenberg appointment was “thoroughly discussed” by the board before he wrote that letter and it was only left out of the board’s minutes due to an oversight. But G. M. Shrum, former head of British Columbia Hydro and an AECL board member until the end of 1972, is not so sure. “1 think the fairest thing for me to say is that Mr. Gray gave us a great deal of information but he didn’t ask us for much advice,” recalls Shrum.

These questions may never be conclusively answered, locked as they are in Swiss bank accounts and the minds of uncooperative or downright hostile witnesses. But the AECL affair has already had a profound impact in Canada, AECL itself is under-

going a complete overhaul to upgrade its financial control mechanisms. It also has a new board of directors and is to have a new president to replace John Foster, who was fired last summer. The company will also come under much tighter control by cabinet in the future.

But still up in the air is the much more difficult question of whether Canada should be exporting nuclear reactors at all. AECL is continuing negotiations for sales to Italy, Romania, Japan and Mexico and would like to sell again to Argentina and South Korea as well. The talks have been temporarily stalled while the government attempts to obtain stiffer guarantees from

potential customers that the reactors will not be used to make bombs. But that may not be an insurmountable obstacle, especially if the government and AECL remain as eager to sell as the customers are to buy.

“This is an important matter for Canadians,” says Campbell, “not just for the CANDU system itself but for the image it creates of our national capabilities in high technology areas.”

But Canadians might well ask: if we have to loan people money at subsidized interest rates to buy CANDU at prices below cost and then bribe them to do it, how great is the accomplishment?1^