Paris Air Show

Troubled BAE Systems fends off charges with outside investigation

 - June 17, 2007, 9:36 AM

As the Paris Air Show opens, UK-based BAE Systems, amidst ongoing allegations of corruption regarding its dealings with Saudi Arabia, has taken steps to open itself to investigation by an independent committee while in the U.S. Congressional committees  recently lifted blocks on some arms transfer requests by BAE North America. But the defense company is still facing investigations on both sides of the Atlantic, which may derail a $40 billion deal Saudi Arabia is about to sign with the UK for 72 Eurofighter Typhoon combat aircraft. BAE Systems is one of the partners in the Eurofighter consortium.

Last week, BAE announced the creation of an “external, expert committee to review and evaluate the company’s…ethics and business processes.” BAE said that this independent enquiry would comprise four people, and named Lord Woolf, a former Lord Chief Justice, to chair it. BAE chairman Dick Olver promised that the committee’s conclusions and recommendations, due in early 2008, would be published in full. “The BAE Systems Board has committed to abide by (its) findings,” he confirmed. However, the Woolf Enquiry will deal only with BAE’s current business.

Although the two Congressional committees removed blocks on some arms transfer requests by BAE North America, the U.S. Department of Justice, or an inter-agency panel on foreign investment in the U.S. that is based in the Treasury, could yet launch formal probes, placing BAE’s $4.5 billion U.S. acquisition of Armor Systems in jeopardy.

BAE’s dealings with Saudi Arabia over a 20-year period have long been the subject of investigations by journalists and, until recently, the UK Serious Fraud Office (SFO) (see story on page 102). But an American connection to the controversial Al-Yamamah contracts was revealed only recently, when BBC Television and The Guardian newspaper disclosed that huge payments had been made from U.S. bank accounts to Prince Bandar bin Sultan, while he was the Saudi Ambassador in Washington.

BAE now derives more than 40 percent of its revenue from North America. Perhaps not surprisingly, a vice president leading one of the key business divisions at one of the top four U.S. defense contractors said he thought BAE’s major competitors would  probably lobby for an investigation, particularly in light of the fact that they feel held to a stricter standard by their government. 

Meanwhile in the UK, the SFO is still investigating BAE’s past dealings with six other countries, its probe into the Al-Yamamah contracts having been stopped by Prime Minister Tony Blair last December “in the national interest,” he said.

The British government signed a memorandum of understanding with Saudi Arabia for the Typhoons in December 2005. Converting that MoU into a contract has evidently proved difficult, and the persistent allegations of corruption have possibly extended the process. British Defence Secretary Des Browne made a then-secret trip to Riyadh in early June to try to advance the deal. UK government and industry sources now say that a signing appeared imminent.

Coincidentally, King Abdullah is due to visit Paris this Thursday for a meeting with President Sarkozy. Will he go on to London and conclude the purchase? It would not be the Saudi style to seal the deal in public, but an official with one of BAE’s rival defense companies suggested “it would be a nice retirement present for [outgoing UK prime minister] Tony Blair.”