The United States Justice Department has launched a corruption probe into Britain’s BAE Systems, a potential headache for Gordon Brown just hours before he succeeds Tony Blair as British prime minister.
BAE, Europe’s biggest military contractor, said on Tuesday the probe will include its dealings with Saudi Arabia under a state-to-state deal that led to Britain’s biggest export deal yet, worth an estimated £43-billion and stretching back to the 1980s.
Shares in BAE, which makes Typhoon jet fighters, Nimrod reconnaissance planes and nuclear-powered submarines, fell as much as 11% on fears the probe could lead to fines, hit its US business and disrupt a new deal with Saudi Arabia.
The probe will also pose an immediate challenge for Brown, who succeeds Blair as prime minister on Wednesday.
Blair called off an inquiry into BAE’s dealings with Saudi Arabia in December last year, saying it would harm national security and relations with the kingdom — a decision that was slammed by anti-bribery campaigners and the British media.
”Our position on the investigation in this country hasn’t changed and we have no comment to make on what happens in the States,” Blair’s spokesperson said. He declined to comment on whether the government would cooperate with the US probe.
Formal investigation
”BAE Systems has been notified by the US Department of Justice that it has commenced a formal investigation relating to the company’s compliance with anti-corruption laws including the company’s business concerning the kingdom of Saudi Arabia,” the company said in a brief statement.
BAE has denied making wrongful payments in its dealings with Saudi Arabia, which include Britain’s biggest arms export deal, known as al-Yamamah. The firm also has a new agreement, known as al-Salam, to supply Saudi Arabia with 72 Eurofighter jets.
”This is bad for sentiment and could delay the signing of the Salam deal,” said analyst Nick Cunningham at brokers Panmure Gordon. ”But it is unlikely to have a material financial impact and could ultimately cauterise the seeping wound of Saudi-related allegations.”
Some analysts said the Justice Department investigation followed lobbying from BAE’s US rivals seeking to disrupt its latest deal with Saudi Arabia and weaken an increasingly powerful competitor.
BAE has made two multibillion-dollar acquisitions in the US in as many years, with its $4,1-billion deal in May to buy army truck maker Armor Holdings set to make it the number-eight supplier to the world’s biggest military market.
But analysts said the timing of the Justice Department investigation — coming after the Armor Holdings purchase was approved by the committee on foreign investment in the US last week — signalled BAE’s US business would probably be unaffected.
”We believe that the US Defence Department will likely continue awarding contracts on the basis of merit,” said UBS analyst Colin Crook, though he warned there was considerable uncertainty over the Justice Department probe and it could last for years.
”If the [Justice Department] ruled against BAE, previous rulings indicate that possible outcomes could include a fine or even a ban on US defence orders for a period of time,” he said. ”Ultimately, given that the contracts in question were between the UK and Saudi Arabia, it is unclear what scope the US has in deciding the size of any penalty, even if BAE is found guilty.”
Closing ranks
British media reports have accused BAE of paying £1-billion over a decade to Saudi Prince Bandar bin Sultan in connection with the al-Yamamah deal.
Bandar, former Saudi ambassador to the US and now secretary general of the Saudi National Security Council, has strongly denied the sums involved represented secret commissions to him, describing this as ”a zenith in fabrication”.
Solicitors for Bandar have said the US accounts at Riggs Bank into which the funds were paid were in the name of the Saudi Arabian Ministry of Defence and Aviation. Any monies paid from them were exclusively for ministry purposes.
BAE has said al-Yamamah was a government-to-government agreement and so all payments involved were made with the express approval of both the Saudi and British governments.
Diplomatic experts said the probe is unlikely to threaten British-Saudi relations, and could even see them close ranks.
Mustafa Alani at the Gulf Research Centre in Dubai said the view in the Arab world is that the US is trying to block technology sales to the region by non-American countries.
At 12.25pm GMT, BAE shares were down 10,5% at 397 pence, valuing the business at about £13,9-billion.
South African visit
British investigators visited South Africa last week as part of their probe into allegations that BAE Systems paid bribes to secure contracts under a multimillion-rand arms deal, while pressure mounts on the company from law-enforcement agencies around the world.
BAE won the tender to supply Hawk trainer aircraft and SAAB Grippen fighters worth R30-billion to South Africa under the deal.
British investigators visited South Africa last week as part of their probe into allegations that BAE Systems paid bribes to secure contracts under the arms deal, while pressure mounts on the company from law enforcement agencies around the world.
BAE won the tender to supply Hawk trainer aircraft and SAAB Grippen fighters worth R30-billion under the deal.
Police spokesperson Sally de Beer confirmed that a team from the British serious fraud office (SFO) had been in the country from June 6 to 11.
The SFO is conducting a wide-ranging investigation into alleged illegal commissions paid by BAE to middlemen in deals involving South Africa, the Czech Republic and Tanzania, and they have previously raided the United Kingdom home and offices of John Bredenkamp, the company’s Southern Africa agent.