US launches BAE corruption investigation

Published on Wednesday 27 June 2007 01:21

BAE Systems shares nosedived yesterday after the British arms manufacturer was subpoenaed by US authorities requesting information on its controversial £43 billion contract to supply military equipment to Saudi Arabia.

On the day Gordon Brown takes power at No 10, the issue could well find its way back onto the UK government's agenda, becoming Brown's first big diplomatic dilemma as prime minister. Shares in the group tumbled 10 per cent, wiping almost 1.6 billion from the value of the company.

Allegations of illegal payments by BAE date back to the 1980s and the Al-Yamamah deal that supplied Saudi with Tornado jets and other military equipment. BAE has been battling a media storm since reports this month alleged the group had paid 1bn of sweeteners to Prince Bandar bin Sultan, the former Saudi ambassador to the US. The payments, "categorically denied" by Prince Bandar, were alleged to have helped BAE secure the contract.

Six months ago the British Serious Fraud Office (SFO) was ordered by Lord Goldsmith, the Attorney General, to drop its fraud investigation into corruption surrounding the deal amid fears it would damage relations with the Saudis. Tony Blair, the Prime Minister, insisted that the UK's national interests faced "complete wreckage" if a fresh investigation into the contract was launched.

It now looks likely the decision of whether to disclose the details of the deal could return to the Ministry of Defence. The Saudis have made it clear they regard the contract as highly confidential, essentially the reason it put pressure on the British to stop the SFO investigation.

"The Saudis will not be overjoyed that the Department of Justice is apparently taking up where the Serious Fraud Office left off," said one analyst yesterday.

An SFO spokesman reiterated the investigation into Al-Yamamah was "closed". The SFO is continuing to look into allegations of corruption involving BAE contracts in Romania, the Czech Republic, Tanzania and South Africa. Downing Street refused to comment.

In a short statement, BAE said that the Department of Justice would be looking into the company's compliance with anti-corruption laws including its business with Saudi Arabia. It refused to comment any further.

It appears the US authorities have became interested because BAE used the US banking system to transfer regular payments to accounts controlled by Prince Bandar at Riggs Bank in Washington. US prosecutors have decided that BAE could be investigated under its Foreign Corrupt Practices Act.

Prince Bandar, the son of the Saudi defence minister, served for 20 years as US ambassador and is now head of the country's national security council.

City experts suggested the new probe could lead to delays in BAE signing a new deal, called Al-Salam, which would see Saudi Arabia buy a further 72 Eurofighter jets.

The probe could also damage BAE's business in North America. It has been looking to expand its US business and is in the process of buying Armor Holdings, a maker of armoured vehicles, for $4.1bn (2.1bn), which was last week approved by the Bush administration. There has been mounting speculation that BAE may move its HQ to the other side of the Atlantic.

Last night Vincent Cable, the deputy leader of the Liberal Democrats, said: "It is extraordinary and embarrassing we have to rely on the higher standards of probity in the United States to investigate alleged corruption by a British company in its overseas business operations."

TIMELINE

1986 - Defence secretary Michael Heseltine signs the first phase of the Al-Yamamah arms deal with the Saudi government for supply and support of Tornado and Hawk jets and a massive airbase construction programme.

1988 - A further formal understanding concerning Al-Yamamah is signed between the UK and Saudi Arabia.

1991 - Saudi Tornado jets fly alongside RAF Tornado bombers in the First Gulf War.

May 2004 - Guardian newspaper alleges that BAE Systems has won the deal with the aid of a secret slush fund.

November 2004 - BAE Systems confirms it is being investigated by the SFO, but denies any wrongdoing.

December 2005 - BAE Systems confirms it has agreed to supply Saudi Arabia with 72 Eurofighter jets.

14 December, 2006 - The Attorney General, Lord Goldsmith, announces that the SFO is dropping its investigation.

6 January, 2007 - Saudi Arabia's defence minister, Crown Prince Sultan bin Abdul Aziz al-Saud, says the country expects delivery of the 72 Eurofighters "very soon".

17 January, 2007 - OECD says there are "serious concerns" about the British probe being dropped.

7 June, 2007 - A BBC investigation claims a former Saudi ambassador to the US, Prince Bandar bin Sultan, received secret payments for over a decade. He "categorically" denies receiving any improper payments and BAE says it acted lawfully at all times.

26 June, 2007 - BAE says it is the subject of an anti-corruption probe by the US department of justice that will look at its compliance with anti-corruption laws including its business "concerning the Kingdom of Saudi Arabia".