‘Offshoring’ Weapons Production and Implications for Export Controls: Lessons from South Africa

Abstract

Large European arms companies increasingly own and control subsidiaries in other parts of the world. These subsidiaries operate hundreds of production sites used to manufacture and export weapons for the benefit of the parent company. Yet, they are bound by the legal framework in host countries. An important case study of this phenomenon is South Africa, which is now the site for numerous subsidiaries of large European arms manufacturers, including Rheinmetall and Hensoldt. Between 2018 and 2021, a Rheinmetall subsidiary in South Africa continued to export weapons to Saudi Arabia despite a German prohibition. This article uses South Africa as a case study to examine the potential consequences of the practice of offshoring in the context of weaknesses in South Africa’s arms export control framework and provides recommendations on how to improve scrutiny and reporting in South Africa’s system to better guard against this type of conduct.

I. Introduction

Rheinmetall Waffe Munition GmbH is the largest weapons manufacturer in Germany and the fifth largest in Europe. The company made €7.2 billion in revenue in 2023 and reported that it expects to generate more than €10 billion in 2024 as demand continues to surge due to the war in Ukraine.¹ Yet, while the company is headquartered in Germany and listed on the Frankfurt Stock Exchange, much of this revenue comes from weapons and related technology manufactured elsewhere. Like most large global weapons companies today, Rheinmetall has a significant number of joint ventures and subsidiaries around the world. It has direct or indirect holdings in 156 corporate entities and employs over 33,000 people in offices or production facilities in 167 locations in 28 countries.² As a result, much of Rheinmetall’s revenue comes from weapons produced outside of Germany that are exported subject to the arms control laws in the country of production rather than German law.

This raises serious risks that companies like Rheinmetall can continue to sell weapons that might be prohibited by domestic arms export controls if they do so through subsidiaries or joint ventures based elsewhere. This is not a hypothetical concern. One of the company’s significant joint ventures is Rheinmetall Denel Munitions (RDM), a joint venture with multiple manufacturing facilities in South Africa; Rheinmetall holds a 51 per cent stake, while South African state-owned arms company Denel holds 49 per cent.³

This article discusses how RDM continued to export weapons to Saudi Arabia for use in the war in Yemen between 2018 and 2021, despite a German prohibition on weapons sales to Saudi Arabia during this period.⁴ This is indicative of a broader global pattern that must be addressed to strengthen the integrity of arms export controls and prevent the export of weapons used in civilian attacks and international law violations.

Rheinmetall’s operations in South Africa date back to its support of South Africa’s apartheid regime. Many companies and states violated the compulsory arms embargo and supplied weapons to the apartheid regime, often at a premium.⁵ Declassified apartheid-era military records reveal that, from the 1970s, European companies, including Rheinmetall, exported weapons to South Africa after the embargo was implemented, including an entire munitions factory near Pretoria set up in 1979.⁶

II. The War in Yemen

The Yemeni civil war officially began in 2014 and involves a complex web of domestic, international and transnational groups. The key external parties to the conflict have been Saudi Arabia and the United Arab Emirates (UAE).⁷ The parties to the conflict and their weapons suppliers are responsible for what became one of the largest global humanitarian crises. Despite a tentative truce since 2022, the situation for civilians in Yemen remains dire. As a result of the war, the United Nations World Food Programme estimates that 377,000 people have died, 4.5 million have been displaced, 21 million need humanitarian assistance and 17 million people do not have enough food.⁸

Evidence shows that a major reason for the war’s disastrous impact on civilians is due to Saudi Arabia, the UAE and their proxies continually targeting civilians in contravention of international law. Throughout the conflict, the United Nations (UN) Group of Eminent International and Regional Experts on Yemen (‘UN Experts’) reported instances of human rights violations and violent attacks on civilians in Yemen and argued that the conduct of Saudi and UAE forces may amount to war crimes.⁹

The UN Experts and others have argued that countries supplying weapons for use in the conflict may have been complicit in war crimes committed by various combatants in Yemen.¹⁰ A 2019 legal opinion by the International Peace Information Service argued that any country supplying weapons to parties they know are targeting civilians in contravention of the Geneva Conventions would violate international human rights law and the Arms Trade Treaty.¹¹

III. Rheinmetall in South Africa—A Case Study in ‘Offshoring’

After the war started in Yemen, demand for weapons from Saudi Arabia and the UAE was a boon for the South African arms industry. South Africa exported more than R11 billion worth of arms to these two states between 2010 and 2020, accounting for more than 20 per cent of all exports from the country. R8 billion in exports came after the Yemen war started.

In 2015 and 2016, nearly half of South Africa’s approved weapons exports were for these two states.¹² These exports included mortars, mortar shells, artillery guns, shells, ammunition, armoured combat vehicles and software for various types of electronic warfare. Much of this was likely used in the Saudi and UAE offensive in Yemen, with devastating consequences for the civilian population.¹³

These exports include those by South African companies that are majority-owned by larger European arms companies like Rheinmetall. RDM has a long-standing relationship with Saudi Arabia, having helped establish a munitions factory in Al-Kharj that was opened in 2016. In late 2018, more direct evidence emerged that munitions manufactured by RDM had been used in attacks on civilians in Yemen.¹⁴

In June 2018, Saudi-UAE coalition forces launched an offensive on the Yemeni port city of Hodeidah. Over the next months, airstrikes and ground attacks from the Saudi and UAE coalition forces became commonplace, along with counterstrikes by Houthi forces defending the city. Scores of civilians were killed.¹⁵ On 2 August 2018, another attack targeted Hodeidah’s fishing harbour. Ambulances rushed casualties to the nearby Al-Thawra Hospital where a second attack targeted survivors and first responders.¹⁶ Sixty people, including children, were killed in the attacks, and more than 100 were wounded.¹⁷

A subsequent investigation by the forensic investigative journalist platform Bellingcat examined video, photographic and satellite evidence of the remaining munitions fragments, patterns of damage and the craters left by bombs. It concluded that the attack was from mortars likely launched by ground forces and that the mortars had characteristics of 120-mm mortar ammunition manufactured by Rheinmetall.¹⁸ The UN Experts also conducted an investigation. In January 2019, the group wrote to the president of the UN Security Council saying that ‘[t]he mortar used for that attack had characteristics of those produced either by Rheinmetall in Germany or by its South African subsidiary Rheinmetall Denel Munition.’¹⁹

Rheinmetall did not respond to Bellingcat’s requests for comment or provide images of examples of its 120mm mortar ammunition.²⁰ However, the company told journalists from German weekly news magazine Stern, that it was contractually prevented from commenting on possible projects relating to possible clients.²¹

The attacks at Hodeiedah and subsequent investigations took place after Germany had placed a ban on weapons exports to Saudi Arabia. Germany, which had previously been a top supplier of weapons to the conflict in Yemen, was among the first states to put a ban in place in March 2018.²² The ban prevented the export of any weapons from Germany to Saudi Arabia and other countries ‘directly involved’ in the Yemen civil war—which at the time included the UAE. The ban was extended several times, especially following the murder of journalist Jamal Khashoggi by the Saudi government in October 2018.²³

In theory, the ban meant that no German companies could export weapons to Saudi Arabia, the world’s third-largest weapons market. In practice, as evidenced by RDM, Rheinmetall’s subsidiaries in other jurisdictions ensured that the company was still able to sell billions to the Saudis despite the ban. Subsidiaries like RDM in South Africa provided a neat conduit for German weapons to continue to fuel the war in Yemen.²⁴

As part of an investigation into these allegations, the nonprofit transparency organization in South Africa, Open Secrets, submitted detailed questions to RDM about their supply of weapons to Saudi Arabia and the UAE, and the evidence of those weapons being used against civilians in Yemen. RDM said that it could not engage with the specifics about their exports to Saudi Arabia and the UAE, because, ‘[i]n line with industry norms and requirements, RDM is not at liberty to share any information relating to agreements entered with its clients […].’²⁵

However, the company did insist that its exports were subject to the South African legal framework and indicated that RDM had to obtain permits from South African authorities prior to any exports.²⁶ This response shows that despite being majority-owned by Rheinmetall, a company that faced a German prohibition on sales to Saudi Arabia and the UAE, its subsidiary in South Africa only had to comply with South Africa’s permit requirements and was able to continue exports to both countries.²⁷The obvious question is whether Rheinmetall and possibly other international companies may see South Africa as a ‘soft touch’ jurisdiction—a discreet backdoor—from which to export weapons to avoid more onerous regulation at home.

IV. Rheinmetall An Example of a Broader Pattern?

The case of RDM appears to be part of a broader pattern for Rheinmetall and the German arms industry, whereby foreign subsidiaries are increasingly important to production and sales. Another German-listed company that has become an important player amongst South Africa’s arms producers is Hensoldt, a part German-state-owned company that specialises in defence and surveillance electronics.²⁸

Headquartered near Munich in Germany, Hensoldt has extensive operations in South Africa and boasts that its two production facilities in Gauteng constitute the company’s ‘biggest international industrial footprint outside of Europe.’²⁹ In 2019, Hensoldt merged its two South African divisions into a single entity called Hensoldt South Africa. The Hensoldt website indicates that this was the first step in growing their ‘South African footprint’ as part of an ambitious growth strategy.³⁰

In late 2019, during the ban on weapons sales from Germany to Saudi Arabia, Hensoldt signed an ‘exclusive agreement’ with Saudi company Intra Defense Technologies in Riyadh. The agreement provided for the co-development of ‘airborne electro-optic systems,’ which could perform high-performance surveillance and targeting from aircraft and unmanned aerial vehicles (UAVs). In January 2021, the media arm of the Houthi forces released footage of a UAV downed by Houthi fighters in Yemen. The Turkish-made Karayel UAV belonged to the Saudi Air Force. Video footage and photographs show the different parts of the drone, revealing that it was carrying an Argos II camera and optical system manufactured by Hensoldt.³¹ Hensoldt manufactures these systems at their South African production facilities.

Academic research undertaken by the Peace Research Institute Frankfurt and published by Greenpeace Germany in 2020 also raised the alarm about a trend of German companies setting up production facilities in other countries to exploit loopholes in domestic restrictions on exporting weapons.³² This was noted as particularly concerning given an increase in the proportion of German-made weapons destined for export to third countries. In the last decade, 60 per cent of all German weapons were exported to a third country, underscoring the role of companies such as RDM which re-export German arms and technology from South Africa.³³

V. Weak Regulation and Opportunities for Abuse

On paper, South Africa has strong arms export controls. Established in 1995, the National Conventional Arms Control Committee (NCACC) consists of ministers and deputy ministers, supported by other government departments that are supposed to monitor the risks associated with arms exports.³⁴ These officials must scrutinize each application to export weapons on a case-by-case basis and must avoid approving exports that are likely to contribute to an escalation in conflict, to be sent to governments that systemically violate human rights, or be used for nonlegitimate defence and security reasons.³⁵

Open Secrets’ investigation showed that the NCACC has a long history of failing in this mandate. In too many instances, the South African government has bowed to the interests of the arms industry and its profits. In 2020, the South African defence minister admitted that South Africa had only ever conducted one inspection of exported defence equipment to ensure that the export conditions were met.³⁶ In 2019, when Saudi Arabia and the UAE raised objections to South Africa’s stated commitment to conduct physical inspections, the NCACC quickly agreed to drop the requirement in favour of inspections by ‘diplomatic process’ following lobbying from companies including RDM.³⁷

To recommit to a human rights-based approach to foreign policy and acknowledge its domestic and international legal obligations, South Africa should consider the following reforms³⁸:

1. 1. The law should be amended to require more regular and detailed reporting by the NCACC to Parliament. Currently, reporting on approved permits only happens after the fact, and with no details about weapons systems or the companies supplying them, precluding scrutiny by Parliament or the public.

2. 2. The NCACC needs to update its list of ‘controlled items’ subject to export controls to align with the latest internationally agreed lists of controlled technologies. This is particularly relevant for new drone technology where lists are being regularly updated.

3. 3. The NCACC needs to undertake rigorous due diligence on the risks associated with weapons exports, before and after considering permit applications. In July 2024, the High Court in Pretoria, South Africa, set aside permits that the NCACC had approved for weapons exports to Myanmar between 2017 and 2021 when serious human rights violations took place there. The court reiterated that the NCACC had an obligation to refuse or suspend permits for export to any country that commits violations of international law.³⁹

Within a context of lax regulation, it is little surprise that European arms companies are extending their production footprint in South Africa. As the cases of RDM and Hensoldt demonstrate, large weapons manufacturers can circumvent domestic bans or limitations on exports to countries by offshoring their production and exports to third countries like South Africa. In the case of the war in Yemen, this allowed companies to sidestep a ban that was, in part, informed by the evidence of war crimes and violations of international law.

This kind of offshoring poses grave risks to the legitimacy and integrity of arms export regimes around the world. Governments concerned with adhering to international legal obligations and enforcing domestic policies should urgently review how their corporations export weapons from third countries.