The Serious Fraud Office’s controversial axing of a corruption inquiry into the Al Yamamah arms contract between Saudi Arabia and BAE Systems has won the backing of Britain’s highest court. But other BAE deals in the USA and eastern Europe continue to be investigated and, says Colin Chinery, corruption accusations track the global arms trade like homing missiles
Slush fund allegations had long trailed Britain’s biggest-ever arms deal, a mid-eighties £43 billion contract between BAE Systems and the Saudi government to provide the desert kingdom with fighter aircraft and training.
Despite the unfolding of an SFO investigation into allegations that ‘slush money’ had been paid to Saudi royals – a charge BAE strenuously denies – another deal was struck in 2005, this time to supply Saudi Arabia with 72 Eurofighter Typhoons and other services.
But in December the following year, the SFO investigation was terminated following threats from the Saudi ruling family and an intervention from Number 10.
The SFO duly complied amid cries that it had caved in to foreign and Whitehall coercion. Now the law lords have ruled it was entitled to submit to what in effect was blackmail, and drop its investigation.
This overturned April’s High Court ruling lambasting the SFO chief at the time, Robert Wardle, for his “abject surrender” in the face of Saudi threats. Had these been made by people subject to English criminal law, said their lordships, they could have led to a charge of attempting to pervert the course of justice.
Pragmatism or pusillanimity? It is a question external to the narrow legal issue that was the business of the courts. But the arguably bigger picture excites polarised opinions. “We must be able to play the game effectively or we are simply outdone by those aspiring to replace us at the top,” said one lawyer. “If you wrestle with a chimney sweep you will always come out looking dirty.” Eric Metcalfe of human rights group Justice saw it differently. “It is a sad day for the rule of law when a senior prosecutor bows to threats from a foreign government and our most senior judges will do nothing to stop it.”
The world’s defence industry, according to Transparency International’s Global Bribe Players Index, is one of the top three sectors for bribery and corruption, along with oil and major infrastructure projects.
The costs are impossible to quantify with precision. But the US Department of Commerce estimates corruption in the arms trade accounts for 50 per cent of all corrupt transactions globally – despite the value of arms traded annually not exceeding one per cent of global trade.
And according to leading US aviation industry authority Richard Aboulafia, Britain and Continental Europe are “somewhat behind the US” in passing anti-corruption legislation. “As the semi-true saying goes, here in the US it’s illegal, while there, it’s often tax-deductible.”
But the Al Yamamah case is different, Aboulafia tells me, being neither a BAE nor an industry issue. “This is a UK Government matter. Not only was the UK Government closely linked to the deal, it is now senior government officials who are trying to close any investigation. BAE is merely a player in a much larger drama.
“The UK, like a lot of other European countries, has a close and even incestuous relationship with their national defence champions. That relationship is potentially more conducive to a mutual tolerance for no-holds-barred sales tactics.”
But enormous cash gifts, like those alleged by the Al Yamamah accusations – with rumours of a £60 million slush fund – are quite rare, says Aboulafia, vice president analysis at Teal Group, the Virginia-based aerospace and defence market intelligence specialists. “Corruption has gone legit. Bribes are problematic, but you can arrange for offsets, with work and money going to new local companies run by very well paid local executives. That’s a much more sophisticated way of arranging arms contracts. And it’s often tax deductible.”
Offsets – agreements requiring a supplier to direct add on benefits to the purchaser as a condition of the sale – take two forms.
– ‘Direct’ – where the purchaser receives work or technology directly related to the weapons sale, typically by producing the weapon system or its components under license
– And ‘indirect’ – investment in the buying country or the transfer of technology unrelated to the weapons being sold.
In one form or the other, arms sales offsets are carried on by some 70 countries, though increasingly unpopular in Washington where it is viewed as contrary to the principles of Free Trade. The stricture – like those of Richard Aboulafia – is rejected by the British Defence Manufacturers Association director general, Rear Admiral Rees Ward.
“Offset is not a legitimate form of corruption. It’s a well established and increasingly widespread commercial mechanism for the procurement of expensive systems and equipment from offshore sources of supply.”
Arms sales involve government expenditure, and governments want to maximise the benefits for their nations, says Ward. “We are talking about legitimate arms procurement, legitimate purchases by national governments in executing their prime role – the defence of the nation. It seems entirely reasonable that these governments should seek offsets – the UK term is ‘industrial participation’ – in pursuit of national policies such as defence industry development to compensate for the outflow of investment.”
Suggestions of offset ‘trousering’ by well-placed officials or businessmen in certain buyer nations are at best very wide of the mark in the majority of cases “and designed to tar everyone with the same brush,” says Rear Admiral Ward. “I don’t think you can say that is the rule; that offsets are distorting the market because all governments are corrupt and lining their own pockets. I don’t subscribe to that. There could be a perfectly legitimate reason for a particular government saying ‘If we purchase your equipment then we would expect offsets to this value and these offsets to be placed in these areas because that is the way we wish to develop our national economy.’”
As for the official US stance, “their government frequently denounces ‘offset’ as being contrary to the great aim of Free Trade, but taken with some of its Buy American policies and Fortress USA pronouncements I find this somewhat ambiguous.
“The US takes a position where if it is buying any foreign equipment, then although it doesn’t ask for offsets, what it does insist on from non-US contractors is a demand for local license production under the guise of security of supply. And, forgive me, that sounds an awful lot like offsets.”
He rejects too allegations that British arms trade anticorruption regulations are deficient. Two years ago leading companies and sector trade associations, including the DMA, combined to set up the UK Defence Industry Anti-Corruption Forum.
“We are very well regulated and work very hard at anticorruption. We run our own seminars alerting people to what goes on and best practice etc. We engage with a number of non-government organisations such as Transparency International, and indeed they were represented at our recent seminar as I recall. There is and will be a competitive advantage to be gained from being a transparently honest and above board seller of arms and systems.
“The UK arms industry is one of the tightest regulated industries and right now is as clean as you get. There are significant disincentives for UK companies to operate outside the law, and I believe we are in the front rank of industries that play to the ethical piece – and much more than some other nations.”
At around £5 billion in recent years, exports make up 40 per cent of British defence industry turnover. “The reason that we can support our armed forces so well is because we have an arms industry that has a substantial centre of gravity of R&D that is sustained by exports.
“This level of success says that we are good at what we do and that we are very competitive at what we do. We sustain a high number of high tech, high value jobs – currently at the 300,000 level – and multiply that up by families then there are a million people in this country directly related to the arms industry.”
Exports are rising, with prospects further enhanced by informed reports that BAE is in talks to sell dozens more Eurofighter Typhoon aircraft to Saudi Arabia. The Law
Lords’ decision, say senior defence industry sources, has given negotiations added impetus – good news for the company’s Lancashire plants employing 11,500 and supporting a supply chain of 1,500 small businesses.
“The Saudi bribe accusations haven’t done BAE’s image any good, but the people who matter are going to realise that this is largely a UK Government case, and less of a BAE case,” says Richard Aboulafia.
“But when the Saudi accusations are connected with the east European accusations, there is clearly a problem for BAE’s image. Probably the smartest thing they’ve done is to keep the US part of the company somewhat separate from the rest. The most important part of the company – BAE’s US entity – has done well maintaining a strong relationship and reputation with the US customer. There’s always a risk of cross- Atlantic brand damage, but so far they’ve been mostly successful.”
Earlier this year, outgoing BAE chief executive Mike Turner said Saudi Arabia should become an important market for the company. “If defence spending in America should ever turn down – and there is absolutely no sign of this happening – then Saudi is a huge opportunity.”