Case Study: BAE-Systems and the Rule of Law

Case Study: BAE-Systems and the Rule of Law
                                                                      Prof. Dr. Johann Graf Lambsdorff

This case study is based on publicly available documents. You are free to use the material for non-commercial,
classroom purposes.

BBC Money Programme, 5 October 2004: BBC lifts the lid on secret BAE slush fund

Prince Turki bin Nasser, a leading member of Saudi Arabia's ruling royal family, was the
principal beneficiary of BAE's millions. For almost 20 years, he was responsible for
overseeing the Saudi side of the massive al-Yamamah arms deals, worth billions of pounds to
BAE. While BAE, formerly known as British Aerospace, consistently refuses to acknowledge
the existence of their slush fund, in the programme Bribing for Britain? one of the men who
lavished luxury on Prince Turki for more than a decade, Peter Gardiner, speaks out for the
first time about what he did…

Mr Gardiner started working with BAE in 1988. The small travel agency he owned soon
became a major conduit for BAE's money, channelling over £7m a year. Mr Gardiner's job
was to lavish luxury on Prince Turki. On BAE's instructions, he reveals the seemingly endless
stream of 5-star hotels, chartered aircraft, luxury limousines, personal security and exotic
holidays he would provide for Prince Turki and his entourage. The Prince's family also
benefited royally from BAE's bounty.

Peter Gardiner gave some of the highlights: Prince Turki's wife got a £170,000 Rolls-Royce
as a birthday present. She and her entourage had a chartered Boeing 747 cargo plane laid on
to fly home their shopping. The Prince's son enjoyed a £99,000 skiing trip in Colorado for
himself and his friends while the Prince's daughter got a video of her wedding costing almost
£200,000. All paid for by BAE…

A three-month summer holiday Mr Gardiner organised for
the prince and his family in 2001 cost BAE £2m..."Film
stars were quite often around at the large hotels that we
were visiting, but they wouldn't be living in this level of
affluence."…Mr Gardiner was also instructed to provide
money; sometimes in cash, sometimes as bank transfers to
pay off credit card bills.

The bank transfers, Mr Gardiner recalls, averaged
$100,000. "We didn't actually ask any questions about it,"
Mr Gardiner says. "We were told to remit the payment and we did so." Big items or small, the
pattern was the same: whatever Prince Turki wanted, Prince Turki got. And BAE paid…

Every month, the wing commander would replace the detailed records documenting the slush
fund spending with a single-page invoice. For August 1995, for example, the invoice simply

reads: "Accommodation services and Support for Overseas visitors" with a total charged of
"£987,365", giving no clue as to what the money had actually been spent on.

Mr Gardiner says the wing commander did this because "he wanted to keep it very private,
very secret, he didn't want prying eyes looking at any of these transactions".

Enquiry

The Money Programme has identified Steve Mogford as the BAE executive who authorised a
series of these slush fund invoices. Mr Mogford is now a director of BAE and chief operating
officer of the company. In the last four months of 1995 alone, the programme reveals, he
signed off slush fund invoices worth over £3m. Mr Mogford is also identified as the BAE
executive who met Martin Bromley, an internal BAE investigator, in 1996 and ordered him to
stop an enquiry he was then conducting into the slush fund…

Speaking exclusively to The Money Programme, Mr Bromley says: "I wasn't happy about it
because I felt that they were probably going to sort of shove it under the carpet. I was a bit
shell-shocked when I came out of the meeting, I have to say." Mr Mogford refused to be
interviewed for the programme, as did BAE.

Wing Commander Winship is not answering questions either, nor is his friend Prince Turki
bin Nasser. In a statement, the Saudi Arabian embassy told The Money Programme that they
were shocked to hear about these allegations of corrupt practice, adding, that "fraudulent
behaviour of any kind is not condoned by the Saudi government or embassy in any way".

In February 2002, the UK Parliament toughened up the law on bribery and corruption,
outlawing payments to foreign government officials. With government investigators now
probing the slush fund operation with the help of Peter Gardiner's extensive records, it may
get more difficult for BAE to go on avoiding the question: Were they, in fact, "Bribing for
Britain"?

In response to the allegations made by the Money Programme, BAE Systems gave the BBC
the following statement:

"BAE Systems is disappointed and surprised that the BBC's Money Programme and other
media are repeating nine-year-old allegations that are ill-informed and wrong. The facts are
that the Al Yamamah contract, which is the subject of these allegations, is a contract between
the governments of the United Kingdom and the Kingdom of Saudi Arabia. BAE Systems can
state categorically that there is not now and there has never been in existence what the media
refers to as a 'slush fund'. Neither has BAE Systems or any of its officers or employees been
involved in false accounting. BAE Systems operates in accordance with the laws of the
United Kingdom and all other countries in which it operates."

BBC on 16.06.2006: Former minister admits Saudi bribes on Newsnight

A former British Secretary for Defence has admitted that Britain's arms sales to Saudi Arabia
have been founded on bribery. The current Government is about to finalise the sales of a
further £40bn worth of arms sales to Saudi, adding to the £50bn worth already completed in
recent years. Lord Gilmour, who was Minister and then Secretary of State for Defence in the

Seventies, told BBC TWO's Newsnight: "You either got the business and bribed or you didn't
bribe and didn't get the business."

Newsnight revealed a number of hitherto secret government memos in which diplomats and
arms sales officials discussed how best to channel the commissions to 'fixers' in Saudi. They
refer to 'the fiddle factor'. One confidential memo, from the head of defence sales, Harold
Hubert, in 1972, speaks of using a company "to provide quasi-government oversight as well
as passing on the douceurs"… Lord Gilmour said: "In those days you either went along with
how the Saudis behaved or what they wanted or you let the US and France have all the
business." I think it would have been quite excessively puritanical for us to say 'oh no we
won't have anything to do with bribes or douceurs, we'll let the other countries get the money'.
It's not something you emblazon about or are particularly proud of. It just happens to be the
terms of trade." Questioned about the legality of 'douceurs' he said: "If you're paying bribes to
high up people in the government (of Saudi) the fact that it's illegal in Saudi law doesn't mean
very much."

Nicholas Gilby of the Campaign Against the Arms Trade said the Seventies documents and
Lord Gilmour's comments expose as "totally false" an MoD claim to a Common Select
Committee in 2003 that the Defence Sales Organisation had never had any role in bribery. He
called on the Government to reveal the truth about its massive Al Yamamah arms deals with
Saudi. A memorandum of understanding for a new Al Yamamah tranche worth £40bn was
signed by the then Defence Secretary John Reid last December. Its confirmation is thought to
be imminent.

The 1992 National Audit Office report into the Al Yamamah deals is the only such report to
have been presented to Parliament and has still not been made public. Professor Phythian said
the secrecy "suggests it's protecting members of the Saudi royal family."

BBB News, Friday, 15 December 2006, Saudi defence deal probe ditched

The Serious Fraud Office has dropped a corruption probe into a defence deal with Saudi
Arabia, after warnings it could damage national security. Attorney General Lord Goldsmith
said the SFO was "discontinuing" its investigation into Britain's biggest defence company,
BAE Systems. The reversal follows reports that Saudi Arabia was considering pulling out of a
deal to buy Eurofighter jets from BAE.

Lord Goldsmith said he thought that a prosecution "could not be brought". He said the
decision had been made in the wider public interest, which had to be balanced against the rule
of law. Lord Goldsmith also told peers that Prime Minister Tony Blair had agreed that the
continuation of the investigation would cause "serious damage" to relations between the UK
and Saudi Arabia. The probe had related to the Al Yamamah arms deal with Saudi Arabia.
BAE has denied any wrongdoing.

Job fears

It emerged earlier this month that French and Saudi officials were in talks over a possible
alternative deal, which could scupper the BAE sale. The Saudi government was reported to
have been angered by the SFO investigation into allegations of a slush fund for members of
the country's royal family.

Lord Goldsmith said that both Mr Blair and Defence Secretary Des Browne had argued that
carrying on the investigation would harm intelligence and diplomatic co-operation with Saudi
Arabia, in turn damaging the UK's national security. No one is going to win any Saudi
business until this SFO investigation ends, according to a senior defence executive

UK defence firms' fears

Responding to the announcement, BAE Systems said: "After over two years of what has been
a thorough investigation by the SFO, we welcome the statement made today by the Attorney
General in the House of Lords." BBC business editor Robert Peston says that major UK
companies - both arms firms and other manufacturers - have voiced fears that they stood to
lose other lucrative deals should the probe have continued.

The SFO said its decision had been taken "following representations that have been made
both to the Attorney General and the Director of the SFO concerning the need to safeguard
national and international security". It added: "No weight has been given to commercial
interests or to the national economic interest."

The Al Yamamah contract with Saudi Arabia is thought to have been worth £40bn to BAE
Systems over the past two decades. Saudi Arabia said in August that it planned to buy 72
Eurofighters to replace its range of Tornado jets, which were also made by BAE.

Liberal Democrat constitutional affairs spokesman Simon Hughes said: "From the moment
investigations began, it was clear that they would not be popular in Saudi Arabia." But to pull
the plug halfway through, and when real progress was just being made, is the worst of all
possible outcomes. "It is not in the interests of a successful British defence industry, of British
exports, or of British diplomatic interests around the world that we cannot now show that our
legal system is above undue influence or improper pressure."

But Shadow Defence Secretary Liam Fox said: "We made it clear that because of the
commercial issues involved we wanted the SFO to make a rapid decision about whether to
continue their inquiry or whether to bring it to an end. "Having decided there is no case to
answer, it will be welcomed by all those concerned."

BBC News, Tuesday, 19 December 2006, Blair pressed on BAE bribe probe

Tony Blair is being asked to justify the dropping of the corruption inquiry into a BAE arms
deal with Saudi Arabia. Tony Blair says the decision was made because of national security
and doubts about any prosecution, rather than commercial pressure from Saudi Arabia. But
Mark Pieth of the Organisation for Economic Cooperation and Development (OECD) said he
had concerns there may have been some political influence. Speaking to the BBC's World at
One programme, Professor Pieth, chairman of the working group on bribery at the OECD,
said a formal request for further explanation would be sent out this week. He said there had
been previous concerns about the UK and these had been "significantly increased" by the
BAE decision. "Obviously we want to know from the UK what exactly happened and I don't
want to jump to a conclusion at the moment," he added.

The OECD convention against bribery, to which Britain signed up in 2001, rules that
investigations should not be influenced by the national economic interest, or the potential
effect upon relations with another state.

The Campaign Against the Arms Trade believes the government has contravened this and
intends to seek a judicial review. Spokesman Simon Hill told the BBC: "We think we have a
case because we think the government has broken the law." And the Liberal Democrats have
demanded to see a National Audit Office report into the Al Yamamah contract - which they
say is the only NAO report never to have been put into the public domain…

But last week Lord Goldsmith told the BBC: "If you are faced with the reality of the situation
that there's going to be massive damage - not to jobs - but to national security, our counter-
terrorism capabilities, vital interests and against that you have the prospect of a case which is
going to go nowhere, then I think the answer is you have to be realistic and bite the bullet."

Many of the allegations pre-date 2001, when the OECD convention was incorporated into
British law - which is one of the reasons why Lord Goldsmith doubted the chances of getting
a conviction.

Others believe the case is a result of a misunderstanding of the way business is done in much
of the Arab world. Labour peer Lord Gilbert, a former minister for defence procurement, said:
"It's a very very difficult area, one man's bribe is another man's commission payment. You get
this sort of ambiguity in the world of commerce very frequently."

The Independent (London), 19 January 2007, Britain rebuked for dropping bribe
inquiry

Tony Blair suffered a humiliating rebuke from an international financial watchdog after it
condemned the Government's decision to abandon a fraud inquiry into a £40bn arms deal with
Saudi Arabia. The Organisation of Economic Co-operation and Development (OECD)
expressed alarm that Britain could have breached its promise to combat corruption in the
developing world. Lord Goldsmith, the Attorney General, also confessed to his unease with
the scrapping of the Saudi investigation…

The Prime Minister has said he takes full responsibility for the decision to end the SFO
inquiry. But he was rebuffed by the OECD yesterday, which said it had "serious concerns as
to whether the decision was consistent with the OECD anti-bribery convention". Angel
Gurria, its secretary general, warned that "appropriate action" would be considered after its
working group on bribery reports in March on Britain's compliance with the convention. The
OECD, which could send a mission to Britain to investigate the case, warned that the
convention's credibility depended on industrialised nations demonstrating the "political will"
to abide by it.

Sir Menzies Campbell, the Liberal Democrat leader, said the episode had done serious
damage to the country's reputation. He said: "Any government other than Mr Blair's would be
deeply embarrassed by this criticism. Whenever British ministers argue the case for a hard
line on corruption elsewhere, for example in developing countries, they will be rightly
accused of double standards."

Following the OECD statement, Lord Goldsmith told the Lords: "It is very important to make
it clear that dropping the investigation into alleged bribes paid by BAE Systems - and it was
not an entirely comfortable decision - doesn't mean we are backing off in any way from our
commitment to tackling international corruption. "On the contrary, I am clear we should re-

double our efforts. I have told the director of the Serious Fraud Office that he should
vigorously pursue current investigations, which include a number of other cases against BAE,
and that we need to do all we can to make sure that he has the resources to do so."…

This week Mr Blair argued that pressing ahead with the SFO inquiry would have been
"devastating for our relationship with an important country with whom we co-operate closely
on terrorism, on security, on the Middle East peace process". He added: "That is leaving aside
the thousands of jobs which would have been lost, which is not the consideration in this case,
but I just point it out."

The Labour MP Roger Berry welcomed the warning from the OECD, which he said would
"have to be taken seriously" by the Government. He predicted that a Commons select
committee would investigate the Government's decision once the OECD had issued its official
written report in March. "There's deep unease about this decision," he said, "but sadly I don't
think this issue is going to go away because I don't think the Government is going to reverse
its decision."

Christian Science Monitor, January 22, 2007, Pressure builds on Blair over weapons
probe

Britain is facing stinging international criticism for smothering a corruption inquiry into arms
deals with Saudi Arabia, a decision that appears to sacrifice probity and rule of law for the
sake of security and commercial relations. … "This is unprecedented," says Helen Fisher, an
OECD spokeswoman. "It's a huge issue at the OECD. The committee makes it very clear that
[bribery] is not a part of doing business, that there has to be a level playing field. When
dealing with developing countries, bribery does massive damage."

Blair's case has been undermined somewhat by reports that MI5 and MI6, the security
services, could not confirm that there were any explicit threats by the Saudis to discontinue
cooperation if the investigation ran its full course. But several security experts say that the
case highlights the awkward dilemma facing Blair.

"The UK does have security problems and the Saudis can help," says Rodney Wilson, a
Middle East expert at Durham University. "It comes down to names and flows of funding and
people who are Al Qaeda sympathizers in the UK, activists," says Professor Wilson. "It's
important information." He says Britain had to balance international flak "with the possibility
of getting blown up.... International criticism is one thing, but the job of the government is to
protect citizens here and abroad and this information does help that."

For others, the scramble to keep the Saudis on board, however, is less understandable. MJ
Gohel, a terrorism expert at the London-based Asia-Pacific Foundation, says Saudi
cooperation in the war on terror has been "half-hearted." The Saudi government has not done
enough, he says, to stop terrorist finance, and its domestic crackdown is aimed more at
antiroyalty elements rather than at anti-Western ones. "They buy a lot of arms from Britain, so
on a trading and financial level it's important, but on a strategic and intelligence level, the
advantages of this alliance are quite dubious," he says...

The 29 other nations in the OECD, along with six observer nations, said last week they all had
"serious concerns" that Britain was in breach of the convention. "To argue that the public
interest was more important than the rule of law is an incredible reversal of 1,000 years of

political struggle to enshrine the public interest in the law," says Lawrence Cockcroft,
chairman of the British branch of Transparency International.

He says the affair will now make it harder for London to lecture others about corruption,
weakening at a stroke the international consensus that has been building in the past decade to
tackle graft.

Financial Times: Friday, February 2, 2007, Britain needs a new agency to fight
corruption

By Bruce Ackerman and Susan Rose-Ackerman (The writers are professors of law and
political science at Yale)

The waves of scandal in Britain show the need to press forward with constitutional redesign.
In the past decade there has been the rise of an independent Bank of England and there are
plans for a supreme court that would separate the judiciary from parliament. Now is the time
to create an anti-corruption agency, distinct from the Serious Fraud Office - and grant it
constitutional independence to insulate prosecutions from political interference...

Viewed from a world perspective, the recent British shift has a larger meaning. It suggests
that the weaknesses of the Westminster system are apparent even in the country that created
it. Yet the new model has its dangers. Proliferation of constitutionally independent agencies,
if taken to extremes, threatens to hollow out democratic politics. It can also create
administrative problems if the separate agencies work at cross purposes.

Nevertheless, recent events involving Tony Blair's government suggest the need for further
reform. Over the past fortnight two close associates of Mr Blair have been arrested on
suspicion of perverting the course of justice in the cash-for-peerages scandal (they deny any
wrongdoing). Yet his attorney-general, Lord Goldsmith, has said he will not stand aside from
advising the Crown Prosecution Service in spite of the case's sensitivity.

This is especially unfortunate in the light of Lord Goldsmith's earlier intervention to stop the
BAE Systems corruption investigation. When challenged, he claimed authority "to balance
the need to maintain the rule of law against the wider public interest". The Organisation for
Economic Co-operation and Development expressed "serious concern" that Britain's decision
violated its commitments under the anti-bribery treaty.

The OECD can put the government on the international hot seat for its scandalous BAE cave-
in, but nothing similar would happen if the attorney-general intervened to stop prosecutions
over cash for peerages. It is too easy for politicians to find a public interest in covering up
political embarrassments. Only a constitutional separation of powers can guarantee the rule of
law in serious anti-corruption cases.

In considering structural reform, Britain can learn from countries that have similar legal
traditions. India's constitution creates an independent election commission and accords its
chief executive the status of a supreme court justice. In spite of India's deserved reputation for
corruption, the system has been effective. Whatever else can be bought and sold in India, the
commission regularly delivers a relatively honest vote count.

The Hong Kong and Singapore governments' reputations for honesty are, in part, a product of
reforms that insulate corruption-fighters from reprisals from corrupt officials and their private
sector allies. Unfortunately, these agencies remain accountable to top political officials. But
they have proved effective within their constraints.

These experiences suggest that constitutional reform can work in countries where corruption
is far more pervasive than in Britain. There is no institutional design that can be imported
ready-made. But in its better days, the Labour government has shown great constitutional
ingenuity. In 1997, Gordon Brown, chancellor of the exchequer, created genuine
independence for the Bank of England. Soon he will be in a perfect position, as the likely new
prime minister, to launch a similar initiative for an anti-corruption agency.

The Sunday Times , March 19, 2007 Monday, Blair did secret deal with Saudis

BRITISH Prime Minister Tony Blair struck a secret deal with the king of Saudi Arabia,
assuring him there would be no criminal charges against anyone implicated in bribery in
Britain's biggest arms deal. In July 2005, Mr Blair assured the then crown prince, Abdullah
bin Abdul Aziz, who is now the Saudi King, that Britain would abandon an inquiry by the
Serious Fraud Office into alleged massive corruption. It concerned a pound stg. 60 million
($146 million) ''slush fund'' allegedly set up by BAE Systems, Britain's biggest military
contractor, to support the lifestyle of some members of the Saudi royal family. Mr Blair told
crown prince Abdullah during a visit to Riyadh, the Saudi capital, that the evidence would
instead be offered to the Saudi authorities. Sources with knowledge of the discussions say that
even as the major fraud inquiry was expanding with the arrest of five British business
executives, Mr Blair was telling crown prince Abdullah that the inquiry ''was going nowhere''.

Disclosure of the secret deal undermines a parliamentary statement made by British Attorney-
General Lord Goldsmith last December that prosecutors, rather than Downing Street, had
made the final decision to drop the inquiry. The news comes as the Organisation for
Economic Co-operation and Development prepares to send inspectors to London to find out
why the inquiry was dropped. The OECD rebuked the Government for its decision to drop the
case.

The row flared last December after Lord Goldsmith announced the halt of the inquiry into the
slush fund. The payments, in the form of lavish holidays, luxury cars, rented apartments and
other perks, are alleged to have been made to ensure the Saudis continued to buy military
supplies from BAE under the Al-Yamamah deal, rather than going to France or elsewhere.
The contract, worth pound stg. 43 billion to date, has kept BAE in business for 20 years.

The inquiry had closed in on a series of secret Swiss bank accounts through which
commissions had been paid. Sources close to the deal say the accounts were in the name of a
Panamanian company ultimately controlled by a British-based businessman who is reported to
have made pound stg. 800 million from the arms deal. Some of the accounts showed
payments to individuals connected to the Saudi royal family.

The Saudi ambassador in London delivered an ultimatum to Mr Blair that, unless the inquiry
was dropped, the King would suspend diplomatic and intelligence ties with Britain. He also
threatened to halt the Al-Yamamah payments, putting 10,000 British military industrial jobs
in jeopardy.

The Sunday Times, June 17 2007, Arms firm paid $600K for Saudi royal's honeymoon

The British arms firm BAE Systems secretly paid nearly pound stg. 250,000 ($588,000) for a
honeymoon for the daughter of Prince Bandar, the Saudi Arabian royal at the centre of bribery
allegations. A senior BAE executive authorised the payments, allowing Bandar's daughter to
enjoy a six-week honeymoon in luxury resorts in Singapore, Malaysia, Bali, Australia and
Hawaii. The couple stayed in five-star hotels costing up to pound stg. 4000 a night and had a
private jet trip to the Great Barrier Reef.

Peter Gardiner, managing director of the travel agency that organised the honeymoon, said:
''BAE instructed me to give Bandar's daughter and her husband the honeymoon of a lifetime
at BAE's expense. Who says that big business doesn't have a heart?'' The disclosure is the
first evidence that Bandar and his family may have benefited from secret payments made by
BAE. The company and Bandar, who was Saudi Arabia's ambassador to Washington at the
time, have denied any impropriety.

Last week, Bandar insisted that claims by the BBC's Panorama program that he had benefited
from payments of more than pound stg. 1billion allegedly given to him by BAE were
''grotesque in their absurdity''. The cash was reportedly used to buy an Airbus 340 jet and
refurbish his official residence in Saudi Arabia. He insists they were approved by the Saudi
Defence Ministry and were given to him in his capacity as a government minister.

However, the honeymoon for Bandar's daughter, Princess Reema, was paid for through a
pound stg. 60m slush fund which Britain's Serious Fraud Office believes was set up by BAE
to encourage Saudi royals to continue with a pound stg. 43billion arms contract to supply
Hawk and Tornado jets. The latest twist in the BAE affair has been disclosed by Mr Gardiner,
who said he has made a detailed statement to the SFO. He described how his company,
Travellers World, was used by BAE to make payments to Saudi royals when they were
holidaying around the world. Mr Gardiner had agreed to testify as the chief prosecution
witness in an expected trial of BAE executives over the deal. The prosecution was halted last
December after the Saudis threatened to suspend diplomatic and intelligence ties…

Financial Times, September 18 2007, Saudi Arabia agrees £4.3bn Eurofighter deal

Saudi Arabia confirmed yesterday it had agreed with the British government to buy 72
Eurofighter Typhoon warplanes at a cost of £4.3bn as part of a contract that defence sources
said could grow to £20bn or more. The announcement came in a statement from the official
Saudi Press Agency, which said that the price of each aircraft - which works out at £61.5m -
was exactly that paid by the Royal Air Force. The reference to the price reflects Saudi
sensitivity to the alleged corruption surrounding a previous order with the UK for Tornados,
first signed in 1986 and enlarged in 1993.

The UK's Serious Fraud Office abandoned an investigation into alleged bribery over the so-
called al-Yamamah deals last December, citing national security, but the US Justice
Department has since embarked on its own investigation.

The Saudi agency, quoting an official source at the Ministry of Defence and Aviation, said the
agreement - known as Project Salam - was signed on September 11 "within the framework of
the existing close defence relationship between the two countries". A statement from the UK

defence ministry described Saudi Arabia as "an important strategic ally for the United
Kingdom in the Middle East". The aircraft will be assembled by BAE Systems at its plant in
Warton, Lancashire. BAE's partners in Euro-fighter are EADS, the Franco-German-Spanish
aerospace and defence company and Italy'sFinmeccanica.

An adviser on strategic affairs to the Saudi government said that, unlike the Tornado deal, no
middlemen were involved in negotiating the agreement. He said a ministerial committee, to be
headed by a respected minister of long-standing, would be established to supervise the
payments and report to King Abdullah. Negotiations are continuing for the armaments
systems to be carried by the aircraft, which could cost an estimated £5bn.

A further contract - estimated by some sources at up to £10bn - for support and maintenance
of the Typhoon envisages building a big new defence infrastructure in the kingdom. This is
expected to include the expansion of air bases and the eventual building of capacity that will
allow aircraft components to be manufactured in Saudi Arabia. The Saudi adviser said a
further negotiation was also envisaged for the upgrading of the existing Tornado aircraft to
achieve what he called "a complete redesign of its fighting capabilities".

UK officials said 24 of the Typhoons would be supplied from aircraft previously scheduled
for delivery to the RAF. These aircraft would come from the second of three tranches of the
RAF's order for Typhoons. The 24 RAF planes would be delivered later and, as a result, the
RAF's existing Tornados would have to be kept in service for longer. Negotiations for a third
tranche - a further 88 planes on top of the 144 already ordered - were not scheduled to be
completed for 18 months, MoD officials said. There is speculation that the third tranche order
may be curtailed, with the UK defence budget under pressure and the UK already involved in
the US-led Joint Strike Fighter project.

S. Williams, The Bae/Saudi Al-Yamamah Contracts: Implications in Law and Public
Procurement. In: International and Comparative Law Quarterly, Vol. 57 (2008). Excerpt
without footnotes, pp. 23-24.

In relation to the SFO investigation into the Al-Yamamah contracts, it is not clear whether the
termination of the investigation on the grounds of ‘national and international security’ was in
compliance with the UK’s obligations under the OECD Convention.

As stated above, Article 5 of the Convention expressly prohibits a State taking into account
considerations of national economic interest, the potential effect upon relations with another
State and the identity of the persons involved in deciding to prosecute foreign bribery. In that
respect, the SFO decision to terminate the investigation may be in breach of the provision
prohibiting taking into account the effect of the investigation upon relations with another
State. Although the reasons given by the SFO for terminating the investigation deny the
presence of Article 5 considerations, the Attorney-General in explaining the decision at the
House of Lords expressly stated that ‘continuation of the investigation would cause serious
damage to UK/Saudi security, intelligence and diplomatic co-operation’. In addition, the
former Prime Minister, Tony Blair, in defending the Government’s decision to terminate the
investigation stated that the investigation was dropped to prevent the ‘wreckage of a vital
strategic relationship’ with Saudi Arabia and the loss of British jobs.

The OECD Convention is silent as to whether national security considerations may be taken
into account in deciding to investigate or prosecute a case of foreign bribery, and it is unclear

whether this means that an implicit national security exception may be read into the
Convention. However, academic authority is weighted against this possibility, especially as
many international treaties which provide a national security exception, expressly say so. It
must be noted, however, that Article 5 is in some respects contradictory in the sense that
although it provides that the investigation and prosecution of an offence should be subject to
the laws of a State Party, which in the UK permit the taking into account of ‘public interest’
considerations, including international relations, the Convention is silent as to the position
where domestic prosecutorial discretion conflicts with the considerations prohibited by
Article 5. Where this occurs, two interpretations are possible: first that one of the sentences
should be read as superseding the other, or secondly, that the second part of Article 5 creates
an obligation on a signatory to transpose those principles into domestic law. Although this has
not been done in the UK … it is submitted that this does not detract from the UK’s obligation
to comply fully with the provision.

The Times, London, March 11 2008, Britain can't afford to be corrupt
By Ben Rose and Arturo John

The Serious Fraud Office’s decision to drop its corruption investigation into the BAE Systems
arms deal with Saudi Arabia is still haunting ministers. Within weeks judgment will be given
in a High Court challenge brought by the Campaign Against Arms Trade and the Corner
House over that decision. And the result will be of more than academic interest. If Lord
Justice Moses criticises the Government as trenchantly as he did in court, the case will not
only finish in the House of Lords — pressure for reform of the corruption Acts will be
overwhelming.

For companies this can only be good news. The UK is signatory to a web of anti-corruption
treaties under the auspices of the Organisation for Economic Co-operation and Development
(OECD), the United Nations, the Council of Europe and the European Union. According to
Transparency International’s bribe payers’ index 2006, the UK is one of the ten countries
whose companies are least likely to use bribery. Superficially, our position looks good.

But as the Corner House case revealed, the conduct of BAE during the al-Yamamah deals was
questionable. The SFO’s decision to pull the plug on the investigation raises questions both
about the rule of law and fairness in deciding which cases to prosecute.

Documents from the judicial review reveal limitations in the SFO’s investigative powers and
its lack of independence. The Prevention of Corruption Act 1906 requires the consent of the
Attorney-General for proceedings. Yet pending any change as a result of the present review of
the post, the Attorney occupies the uncomfortable position of being both law officer and
member of the Government.

As if this were not bad enough, Article 5 of the OECD Convention specifically prohibits the
possible adverse effects on economic trade or the relations between states from being taken
into account when deciding to prosecute a case of international bribery. Yet as a matter of UK
Government policy the Attorney-General is permitted, before reaching a decision, to obtain
“soundings” from government departments — in which, presumably, trade and politics are the
key factors.

In BAE, Tony Blair, then Prime Minister, and the Ministry of Defence managed both to flag
up in lurid terms and to disavow important economic considerations and UK-Saudi relations
when lobbying the Attorney.

Robert Wardle, director of the SFO, and Lord Goldsmith, QC, then Attorney-General, who
united in terminating the investigation, still differ on central aspects of the Prevention of
Corruption Act. The 1906 Act reflects its origins. At its heart is the concept of breach of trust
by an agent acting on behalf of a principal. Today, the hurdle this creates to prosecution is
often insuperable. Not least of the problems is that consent to the allegedly corrupt payment
by the principal constitutes a defence for the agent. The more corrupt the country, the less
likely you are to commit an offence of corruption.

Few other countries include the agent/principal element in their definition of corruption. The
Government issued reform proposals in 1997, followed by a Law Commission report in 1998,
a White Paper in 2000, a draft corruption Bill in 2003, a Home Office consultation in 2005
and a finally a Law Commission consultation in November 2007, all shifting the emphasis
from breach of trust to improper act/breach of duty…

BBC, April 10: UK wrong to halt Saudi arms probe

In handing down the decision on Thursday, one of the judges, Lord Justice Moses, told the
High Court that the SFO and the government had given into "blatant threats" that Saudi co-
operation in the fight against terror would end unless the probe into corruption was halted. He
added that the SFO had failed to assure them that everything had been done to meet the rule
of law. "No one, whether within this country or outside, is entitled to interfere with the course
of our justice," he said. "It is the failure of government and the defendant to bear that essential
principle in mind that justifies the intervention of this court."

BBC, April 10: Q&A: The BAE-Saudi allegations

The ruling from the High Court said that stopping the investigation was unlawful, not that it
should be reopened. The Saudi royal family was deeply concerned about the idea that the
investigators might try to open up their Swiss bank accounts. "A senior Saudi price was able
to say, 'You go into the bank accounts and we stop the co-operation'," said BBC security
correspondent Frank Gardner. "I was suspicious at first about whether this was said to British
officials but it was, I'm told."

The Guardian, April 11 2008: Cash, contracts and crown princes

… Lord Justice Moses' judgment yesterday lays bare what actually happened. In doing so, he
appears to accept allegations that have swirled round Whitehall since Wardle announced he
was to drop his investigation 18 months ago - although without hearing evidence from
Bandar. Wardle's inquiries were bearing fruit, and he was on the brink of obtaining bank
records from Switzerland.

These belonged, among others, to the billionaire Syrian intermediary Wafic Said, who played
a major role in brokering the £43bn al-Yamamah arms deal back in the mid-80s. He is a
confidant of Crown Prince Sultan, and of his son, Prince Bandar. Prior to the investigation
being halted, the SFO were looking into payments by BAE into Said's accounts.

Moses, who insisted on seeing privately the full version of government documents in the case,
made clear what happened next. He detailed allegations that Bandar set out to have the
inquiry stopped. Yesterday's summary described reports of Bandar going to see Jonathan
Powell, Blair's chief of staff. He is said to have told him and the British ambassador, Sherard
Cowper-Cowles, that he would ensure Saudi intelligence links were cut unless he and his
family were kept out of the case.

Bandar then flew to Paris and engaged in ostentatious negotiations with the French to buy a
new batch of fighter jets - the contract BAE itself was after. As the judge pointed out
yesterday, Bandar was suspected of complicity with BAE, the target of the investigation. He
admits he received from BAE a present of a new Airbus commercial airliner, and payments
totalling £1bn into his US account, although he says they were not improper…

Moses' landmark judgment also produced a score sheet of how all the parties behaved during
the SFO investigation. BAE is shown to have tried to use backstairs political muscle to get the
police off its back. But this did not succeed. Peter Goldsmith, the attorney general, stood firm
against pressure from fellow ministers for a considerable period. Even at the last moment he
met Blair and told him it would look terrible to cave in to threats. But he then succumbed to
pressure from the then prime minister, and appeared to have agreed to try and sabotage the
SFO inquiry by picking holes in its evidence. Wardle himself held out longest of all, but was
eventually forced to cave in when Blair raised the stakes…

The Independent, UK, 19 May 2008: BAE chief detained as US turns up heat in bribes
case

BAE Systems admitted yesterday that American authorities investigating corruption claims
over an arms deal with Saudi Arabia had issued a series of subpoenas to senior executives, as
the investigation continues to gather pace… The chief executive, Mike Turner, and an
unnamed senior colleague were held for 20 minutes by US law enforcement agents at George
Bush International Airport this week. The pair were served with subpoenas while they were
detained at the airport. A further three executives, all based in the US, were served at home.
The spokesman said Mr Turner had now returned to Britain, but added that he had not been
prevented from entering the US last week. He declined to comment on the nature of the
subpoenas, which could range from requests for information, to orders for a personal
appearance in front of a jury to give evidence…

News that Mr Turner and others were detained in Houston suggests that the DoJ investigation
is proceeding at some pace, 11 months after BAE first disclosed its existence. On a single day
in June last year, BAE shares fell by 8 per cent amid concerns that the DoJ could impose
significant sanctions under its powerful Foreign Corrupt Practices Act (FCPA), and that the
problems could affect the company's lucrative and deepening business ties with the US
military. The FCPA gives US authorities the power to prosecute offences of corporate bribery,
even if the company involved is not American and the bribery is carried out overseas.

The Act has its roots in a string of scandals in the US aerospace industry in the Seventies,
when hundreds of firms admitted paying bribes to secure contracts overseas. Last year the US
government collected more than $100m in fines from oil, chemical and telecoms companies
under the FCP. The number of foreign bribery cases filed by criminal and civil investigators
in the US has more than doubled since 2004.

Firms which issue shares or bonds in the US are subject to the Act, as are any firms found to
have used the US phone, mail or banking systems as part of the bribery scheme. The now
defunct Riggs bank in Washington was used to channel some payments under the Al-
Yamamah deal, it was revealed last year, although BAE says those payments were legitimate.
Separately, BAE will today announce it has been awarded a £43.9m contract with the
Ministry of Defence to maintain the Royal Air Force's tanking and transport fleet of VC10s.

The Guardian, UK, 30 July 2008: Lords rule SFO was lawful in halting BAE arms
corruption inquiry

The House of Lords ruled today that the Serious Fraud Office acted lawfully in stopping an
inquiry into bribery allegations during an arms deal between Saudi Arabia and BAE Systems.
The five law lords unanimously overturned a high court decision in April that Tony Blair's
government and the SFO caved in too readily to threats by Saudi Arabia over intelligence
sharing and trade. In today's ruling, the senior law lord, Lord Bingham, said the SFO's former
director, Robert Wardle, was confronted by an "ugly and obviously unwelcome threat"…

The human rights director of the campaign group Justice, Eric Metcalfe, described the
decision as "a bad day for the rule of law"…

It was only after meeting the British ambassador to Saudi Arabia, Sir Sherard Cowper-Coles,
who warned of a grave danger to British citizens if the Saudis withdrew counter-terrorism
cooperation, that he began to believe that the threat to British national security "might be so
compelling that I would have no real alternative". Bingham concluded that Wardle's judgment
that the public interest in saving British lives outweighed the public interest in pursuing BAE
to conviction was "courageous". He noted Wardle's concern that discontinuing the
investigation "went against every instinct as a prosecutor"…

In a hearing before the law lords earlier this month, Jonathan Sumption QC, representing the
SFO, argued that Wardle made a legal and appropriate decision to stop the corruption inquiry
in late 2006 after receiving threats from the Saudi Arabian government to withhold
cooperation on critical issues of anti-terrorism. "The SFO director was convinced that Saudi
Arabia wasn't bluffing," he said.

Sumption told the Lords the high court made several incorrect assumptions about the law and
the agency's actions, noting that some of the key evidence had been "redacted", or heavily
edited, for security and diplomatic reasons. "They proceeded on limited information available
to them," Sumption said.

He criticised the high court for highlighting the alleged direct involvement of Saudi Prince
Bandar bin Sultan, the former ambassador to the United States and now head of Saudi
Arabia's national security council, in making the threats to drop a multibillion-pound Typhoon
Eurofighter contract before the inquiry was halted. "The director has not given evidence one
way or the other about the involvement of Prince Bandar in the utterance of these threats." He
said the threat came from "several channels over a period of time".

Appendix

OECD Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions (excerpt)

On 21 November 1997, OECD Member countries and five non-member countries, Argentina,
Brazil, Bulgaria, Chile and the Slovak Republic, adopted a Convention on Combating Bribery
of Foreign Public Officials in International Business Transactions. Signature of the
Convention took place in Paris on 17 December 1997.

Article 1 - The Offence of Bribery of Foreign Public Officials:

1. Each Party shall take such measures as may be necessary to establish that it is a criminal
offence under its law for any person intentionally to offer, promise or give any undue
pecuniary or other advantage, whether directly or through intermediaries, to a foreign public
official, for that official or for a third party, in order that the official act or refrain from acting
in relation to the performance of official duties, in order to obtain or retain business or other
improper advantage in the conduct of international business.

2. Each Party shall take any measures necessary to establish that complicity in, including
incitement, aiding and abetting, or authorisation of an act of bribery of a foreign public
official shall be a criminal offence. Attempt and conspiracy to bribe a foreign public official
shall be criminal offences to the same extent as attempt and conspiracy to bribe a public
official of that Party.

Article 5 - Enforcement

Investigation and prosecution of the bribery of a foreign public official shall be subject to the
applicable rules and principles of each Party. They shall not be influenced by considerations
of national economic interest, the potential effect upon relations with another State or the
identity of the natural or legal persons involved.

Prevention of Corruption Act 1906

1. — (1) If any agent corruptly accepts or obtains, or agrees to accept or attempts to obtain,
from any person, for himself or for any other person, any gift or consideration as an
inducement or reward for doing or forbearing to do, or for having after the passing of this Act
done or forborne to do, any act in relation to his principal’s affairs or business, or for showing
or forbearing to show favour or disfavour to any person in relation to his principal’s affairs or
business; or
        If any person corruptly gives or agrees to give or offers any gift or consideration to
any agent as an inducement or reward for doing or forbearing to do, or for having after the
passing of this Act done or forborne to do, any act in relation to his principal’s affairs or
business, or for showing or forbearing to show favour or disfavour to any person in relation to
his principal’s affairs or business; or
        If any person knowingly gives to any agent, or if any agent knowingly uses with intent
to deceive his principal, any receipt, account, or other document in respect of which the
principal is interested, and which contains any statement which is false or erroneous or

defective in any material particular, and which to his knowledge is intended to mislead the
principal:

he shall be guilty of a misdemeanour, and shall be liable—
        (a) on summary conviction, to imprisonment for a term not exceeding 6 months or to a
        fine not exceeding the statutory maximum, or to both; and
        (b) on conviction on indictment, to imprisonment for a term not exceeding 7 years or
        to a fine, or to both.                                                                      Kommentar [JGL1]: Words and
                                                                                                    s. 1(1)(a)(b) substituted by Criminal
(2) For the purposes of this Act the expression “consideration” includes valuable                   Justice Act 1988 (c. 33, SIF 39:1),
consideration of any kind; the expression “agent” includes any person employed by or acting         ss. 47(2)(3), 123(6), Sch. 8 para. 16
for another; and the expression “principal” includes an employer.
(3) For the purposes of this Act it is immaterial if—
        (a) the principal’s affairs or business have no connection with the United Kingdom
        and are conducted in a country or territory outside the United Kingdom;
        (b) the agent’s functions have no connection with the United Kingdom and are carried
        out in a country or territory outside the United Kingdom.                                   Kommentar [JGL2]: S. 1(4)
                                                                                                    inserted (E.W.N.I.) (14.2.2002) by
2.— (1) A prosecution for an offence under this Act shall not be instituted without the             2001 c. 24, s. 108(2); S.I. 2002/228,
consent, in England of the Attorney-General.                                                        art. 2.

The BAE deal with Saudi Arabia – The history

The Al-Yamamah arms deal is said to be the biggest sale of British goods in the nation's
     history. As well as dozens of fighter jets, it also included naval vessels, missiles and the
     construction of an air base. The contract was said to have been clinched by the lobbying
     of former prime minister Margaret Thatcher, with her Defence Secretary Michael
     Heseltine signing its first phase in 1985.
1987 First aircraft delivered by British Aerospace (later BAE Systems)
1988 Second stage of deal signed
1992 National Audit Office investigates contract. Its report is never published
Delivery continued until the late-1990s and BAE then began negotiations to supply
     Eurofighter aircraft to Saudi Arabia.
December 1997: 29 OECD members (including the UK) plus Argentina, Brazil, Bulgaria,
     Chile and Slovakia sign an international Convention on Combating Bribery of Foreign
     Public Officials in International Business Transactions.
14 February 2002 The Prevention of Corruption Act is amended to explicitly address bribery
     outside the United Kingdom.
2003 Newspaper allegations about a secret slush fund into which BAE Systems paid bribes.
2004 BAE Systems confirms it is being investigated by the Serious Fraud Office
1 December 2006 BAE Systems admits that negotiations over the Eurofighter have slowed.
     The French planemaker Dassault says it is in talks to sell a rival jet, the Rafale, to Saudi
     Arabia
14 December 2006 Attorney General, announces that the SFO is dropping its investigation
17 September 2007, Saudi Arabia agrees with the British government to buy 72 Eurofighter
     Typhoon warplanes at a cost of £4.3bn as part of a contract that defence sources said
     could grow to £20bn or more.
10 April 2008 The British High Court rules that the stopping of the SFO investigation was
     unlawful.