BAE Systems – a case that will not die

Just in case you had no faith in the US Department of Justice, take note that when BAE Systems’ chief executive Mike Turner and director Sir Nigel Rudd landed at Houston airport in May, they were arrested. Their documents, mobile phones and laptops were examined and they were told to come back for interviews at a later date. The pair were detained for all of 30 minutes, considerable inconvenience will have resulted. Unfortunately, the Justice Department’s concerns are not so much the matter of trading in death, for BAE is Britain’s biggest arms company, but rather BAE taking an unfair advantage over its US rivals by allegedly offering bribes to secure the £43 billion Al Yamamah contract with Saudi Arabia in 1985. This is considered not fair and plainly disconcerts Boeing, Lockheed Martin and the rest who consequently lost out. Justice must be done! Trevor Rayne reports on a case that will not die.

Richard Jordan Gatling, of the Gatling gun, recommended in the 1870s that ‘our best policy will be to keep up the prices of the guns and give liberal commissions’. This is the customary practice and well understood as essential if a country is to maintain its arms industry. This industry requires exports if it is to survive and exports require ‘commissions’, ‘agents’ fees’ and above all discretion. Traditionally, before the 1970s and such as the Lockheed scandal (where Prince Bernhard of the Netherlands was removed from duties for being thought to be ‘on the take’ in securing the Dutch purchase of F-104 Starfighter aircraft), governments would arrange payments and receipts themselves. However, in the age of privatisation, such responsibilities are sub-contracted out, with governments paying firms inflated prices for arms and the firms passing the money on to agents and other intermediaries as payments for ‘support services’ and the like – about which the government (and Ministry of Defence – MoD) ‘know nothing’.   

Paying commissions to corrupt Middle Eastern government ministers is well-established practice for BAE. Its forerunner, BAC, paid bribes in 1965 to encourage Saudi Arabia’s purchase of rifles and ammunition.  However, £43 billion, the biggest contract ever awarded to a British firm, and reputed payments of £30 million every quarter for 10 years into a US bank account controlled by the son of the Saudi Defence Minister, are not easy to hide and incite envy.

The Serious Fraud Office (SFO) wrote to the Permanent Secretary at the Ministry of Defence, Kevin Tebbit, about allegations concerning BAE Systems in 2001. Tebbit replied that he had ‘no wish to set damaging hares running’ and had ‘conducted a discreet initial exploration of the allegations’ implications’. Tebbit asked the Chair of BAE Systems who reassured him that it was an ‘old story’ and that BAE was committed ‘to operation within the law’. Labour Defence Secretary Geoff Hoon said that, ‘Sir Kevin looked into the issue at the time and was satisfied that the allegations were of no relevance to the MoD and that no contractual impropriety regarding government employees existed.’ Surprisingly unconvinced by all this, the SFO continued investigations. A report by the National Audit Office into Al Yamamah has not been published. The government halted the SFO investigation at the end of 2006 citing ‘security grounds’ and co-operation with Saudi Arabia in the war against terrorism. The MoD pressured for the investigation to stop.

This April the High Court ruled that the SFO had acted ‘unlawfully’ when it decided to end its investigation into the allegations. The SFO is now appealing against the judgment. Should anyone anywhere be concerned about any laxity in BAE System’s ethical standards, the firm hired, ‘allegedly’ for £500,000, the services of the senior judge Lord Woolf to examine procedures so that ‘no similar allegations arise in the future’. Lord Woolf issued his recommendations in early May: BAE should develop, publish and implement a code of ethical business conduct; it should forbid ‘facilitation’ payments. BAE should be open and transparent and similar value for money suggestions from the noble Lord – who felt no need to add comment on public relations.

What is intriguing about the Houston arrests is that BAE owns companies in the US and employs over 25,000 people there. In 2003 this contributed to BAE being given official recognition by the Pentagon as an ‘American’ company for defence procurement purchases. BAE Systems also owns three Swedish defence companies (Saab, Haaglunds and Bofors) and could be central to the development of the European arms industry to rival that of the US. US arms companies have an interest in seeing that BAE is on-board. US shareholdings in BAE increased from 12.6% in 2004 to 26% in 2006. Consequently, BAE Systems is positioned at a critical juncture between Britain, the US and Europe, that repeatedly generates serious disputes in the British ruling class (Cabinet divisions over the sale of Westland helicopters, Thatcher’s removal from Prime Minister and the war on Iraq). The case of BAE Systems is unlikely to quietly fade away.

(Acknowledgment to The Economics of Peace and Security Journal)

FRFI 203 June / July 2008


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