BAE System's Dirty Dealings

It sounds like the stuff of pulp fiction: The UK's largest armaments producer running a £20 million ($33.4 million) slush fund to finance prostitutes, gambling trips, yachts, sports cars, and more for its most important clients the Saudi royal family and their intermediaries, greasing the wheels of the largest business deal in UK history. These are the accusations made last month by a former employee of weapons giant BAE Systems. And evidence has surfaced that members of the British government were aware of the bribe arrangement, but looked the other way.

BAE Systems, formerly known as British Aerospace, is one of the world's top arms producers. It manufactures warplanes, avionics, submarines, surface ships, radar, electronics, and guided weapons systems, generating annual sales of £12 billion ($20 billion) in 130 countries. The arms giant was formed as a nationalized British defense corporation in 1977, which was subsequently privatized in the early 1980s, and changed its name to BAE when British Aerospace merged with Marconi Electronic Systems in 1999.

BAE Systems' North American branch has an unusual special relationship with the Pentagon where it is treated as a domestic arms company. According to Ian Prichard of the British Campaign Against Arms Trade (CAAT), "BAES North America appears to be virtually a separate company - even top UK executives are not privy to the more sensitive work carried out by 'their' company in the US."

For years the company has been accused of selling arms to impoverished and dictatorial regimes, polluting the environment, and has been dogged for years by allegations of corrupt dealings.

Now those allegations have exploded into the open. Revelations point to BAE's provision of enticements to the Saudis over a fifteen year period, starting in the late 1980s, using a front company Robert Lee International (RLI), to divert funds to the arms clients and their middlemen. Among other allegations, RLI procured prostitutes for visiting Saudi officials and bought houses for mistresses, while an internal BAE statement reportedly refers to "sex and bondage with Saudi princes". According to documents published by The Guardian, the British government's Serious Fraud Office (SFO) alerted the Ministry of Defense of the possible involvement of BAE's chairman Sir Richard Evans in the bribe scheme, but the Ministry of Defense did nothing.

BAE Systems' chief executive Mike Turner didn't deny the slush fund charges. At a press conference following the revelations, he stated, "They are old allegations and they are old hat. They are history." Turner added, "Everything we do is legal and that is all I am prepared to say. Whatever the law is, we are legal."

Al-Yamamah

The slush fund allegations are tied to the biggest export agreement in British history - the Al-Yamamah (The Dove) arms deals that the British government signed with the Saudi royal family. BAE, then known as British Aerospace, was to sell the Saudis 72 Tornado and 30 Hawk advanced fighter-bombers along with other tranches of military hardware.

In an unusual barter arrangement between the two governments, the Saudis were to purchase the armaments in payments of oil, over an unspecified period of time. Over the last two and a half decades, the deals have amounted to the sale of 96 Tornado Fighters and more than 100 Hawk jets and other training aircraft totaling at least £20 billion ($33.4 billion), with BAE taking in an estimated £1.5 billion a year. BAE is currently in negotiations with the Saudis for a further extension of the Al-Yamamah deal.

The first Al-Yamamah deal was signed in 1986, when the Saudis' main armaments supplier, the United States, was blocked from selling arms to their longtime ally by an historic Congressional vote. The House of Saud turned to British weapons manufacturers instead. The Saudis were happy to reduce their dependence on the US, while the UK saw the petrodollar-rich Saudis as a long term bonanza. A second deal between the two governments was signed in 1988. Some analysts believe that Al-Yamamah kept BAE afloat through the 1990s when the company was facing financial difficulties.

Rotten from the Beginning

While armaments transactions are known to be fraught with bribery, British journalist and arms trade opponent Gideon Burrows states that Al-Yamamah "may be the world's most corrupt deal". And while the scandal around allegations of the BAE slush fund are particularly lurid, accusations of corruption date back to the creation of Al-Yamamah I and II, as they've come to be known.

According to former CIA operative Robert Baer much of the money that BAE registered as earnings from Al-Yamamah was earmarked from its inception for kickbacks to members of the Saudi royal family and other intermediaries. "[Al-Yamamah] was a huge commission-generating machine. British Aerospace overcharged for its hardware and spare parts, with the difference going to commissions."

The Saudis are not the only ones who may have profited from Al-Yamamah kickbacks. In 1994 MP Tam Dalyell accused the son of then Prime Minister Margaret Thatcher of receiving a £12 million commission from the Al-Yamamah deal, but the government declined to investigate the charges against Mark Thatcher. Less fortunate was British Defense Procurement Minister Jonathan Aiken who played a key role in setting up Al-Yamamah II. He was imprisoned in 1993 for letting the Saudis pick up his tab at the Paris Ritz.

The British government and BAE have been criticized from the start by arms watchdog groups for selling weapons to a despotic, theocratic regime. Amnesty International characterizes Saudi Arabia, the world's top arms buyer, as a major violator of human rights: "Summary, unfair and secret trials are the norm in Saudi Arabia and torture is a common practice to extract confessions from suspects. Defendants facing capital charge are invariably convicted after trials which lack the most basic standards of fairness." A 1995 Channel 4 "Dispatches" documentary revealed that BAE tried to sell electric shock batons to Saudi Arabia two years earlier, which could be used for the torture of prisoners.

Hawk Jets

If the current allegations of the Saudi slush fund weren't bad enough, BAE is in the center of another storm of controversy. This summer, BAE finally clinched a highly contentious deal to sell 66 Hawk jets to India - for which the poverty-stricken nation paid £1billion ($1.7 billion).

The agreement, which threatened to fall through a number of times, was helped along by the intervention of the British government. In 2002, in the midst of heightened tensions between India and Pakistan over Kashmir that threatened to turn into a nuclear war, British Prime Minister Tony Blair visited the two countries ostensibly on a peace-making mission. However, as the Indian media revealed, he used the visit as an opportunity to promote the sale of BAE Systems Hawk jets, as did his Foreign Secretary Geoff Hoon later in the year.

"The same time that the prime minister and the foreign secretary have been over in India trying to play a role as a peace broker in the Kashmir crisis, we've also in effect been acting as an arms broker," says Andy McLean of the London-based think tank Saferworld. "And the government has been directly pushing the sale of jets which we will know could be used both directly in Kashmir and also will be used to train Indian pilots to fly much more deadly fighter jets which could also be used in Kashmir and potentially which could be used to carry nuclear weapons."

McLean says that BAE Systems' dealings in India are not an anomaly. "The Hawk jet [has] almost become synonymous in the UK with scandal in the arms trade," he says. "It was Hawk jets that were licensed for export to Indonesia and were then found after years of protestation from human rights groups to have been used to intimate the civilian population in East Timor. This was denied by the government for years but was then actually admitted by the Indonesian armed forces."

The British government also allowed export licenses for the sale of BAE's Hawk jets to Zimbabwe, which is was later forced to revoke Zimbabwe became involved in the conflict in the Democratic Republic of the Congo. BAE has targeted other poor African countries for arms sales. "It was also British Aerospace which manufactured the military radar system that has cost the Tanzania people £28 million ($46.8 million) that could have been used on providing fresh water and vaccinations for the population there," says McLean.

Government Role

Business between BAE and the governments of impoverished countries like Indonesia, Zaire and Tanzania would not be possible without the sanctioning of the British state, which must issue export licenses for such sales to go through. Fortunately for BAE, the UK government - the world's second largest arms exporter - is a most faithful ally, promoting BAE's interests through the Ministry of Defense's Defense Export Sales Organisation (DESO), whose role is to encourage the sale of British weapons abroad.

BAE and other arms companies get further assistance from the British government's Export Credit Guarantee Department (ECGD) which underwrites the transactions between the weapons companies and potentially unreliable buyers, loaning out UK tax payers' money for the foreign purchase of British-made arms. BAE has received more Export Credit Guarantees than any other UK company in recent times.

The Blair Labour government has proved itself as steadfast a supporter of the arms industry in general, and BAE in particular, like the governments of its Conservative predecessors Margaret Thatcher and John Major - The Observer refers to BAE chairman Sir Richard Evans as "one of the few businessmen who can see Blair on request". Before its ascendancy to power, the Labour government promised to publish the conclusions of a 1992 investigation into charges of corruption by BAE in the Al-Yamamah deals by the National Audit Office (NAO). However, the audit has never been published.

The Blair government has defended its backing of the arms industry by claiming that companies like BAE Systems play a central role in the economy. Arms critic Richard Bingley and former member of CAAT disagrees. "On the face of it, the arms export business is reckoned to be quite lucrative, its worth about £5 billion to the UK Exchequer every year. However, when you take away overheads and then also look at the fact that the arms trade is subsidized by about £1 billion per year by the UK Exchequer, actually you begin to see there's no profit line by exporting arms. So literally, it is at best an industry that pays for itself."

Under Fire

Despite the British government's ongoing support for BAE, pressure is mounting on the armaments giant. Adding to the embarrassment of the slush fund scandal, activist groups like the Campaign for Nuclear Disarmament, the International Action Network on Small Arms (IANSA), Oxfam, Amnesty International, and Friends of the Earth UK are putting the spotlight on BAE's role in perpetuating armed conflicts around the world.

Earlier this year, Friends of the Earth UK launched a campaign against BAE's production of depleted uranium shells which have been used by British soldiers in Iraq. Hannah Griffiths, corporate campaigner at Friends of the Earth UK, said: "We want the directors of companies like BAE to take their duties to communities and the environment as seriously as they do their duties to the company's bottom line".

The Campaign Against Arms Trade has also been targeting BAE with protests at 40 sites all across England, Wales and Scotland that belong to BAE or its subsidiaries, accusing BAE of fanning the flames of war.

Meanwhile BAE has also targeted CAAT. The Sunday Times (London) revealed in September that BAE paid a private intelligence firm £120,000 a year to infiltrate and spy on CAAT over a four year period in the 1990s. The head of the firm told BAE that she had a database containing more than 148,000 names and addresses of arms trade and peace activists, environmentalists and union members. CAAT issued a statement denouncing BAE's actions. "The alleged theft of the supporter database, by copying it, is illegal and entirely unacceptable. CAAT is considering how to pursue the allegation," it said.

A New Al-Yamamah

In spite of the recent bribery revelations, BAE is intent on pressing ahead with a new Al-Yamamah deal with the Saudis, according to a statement by the Swiss investment bank UBS.

In the last decade and a half the Saudis have had difficulties holding up their end of the arms-for-oil bargain, as the price of petroleum has fluctuated and the Saudi domestic debt has continued to mushroom, while arms purchases gobble up a third of the national budget. However, recently Saudi Arabia's fortunes have been buoyed by higher oil prices, while their relationship with their other main weapons supplier has gotten chillier. "Now that the US is on the outs with the Saudis and pulling US troops out of Saudi Arabia, the Saudis are looking more to Europe for their defense needs," says analyst Frida Berrigan of the Arms Trade Resource Center in New York.

The new agreement would be to upgrade 85 Tornado fighter planes that were purchased in an earlier Al-Yamamah deal. If it goes through it would be a boost to the beleaguered weapons giant, which has been having difficulties arranging a merger with a US defense company. But it would be anything but a boon for British taxpayers, who would continue to subsidize BAE, or the Saudi populace, who would see none of the kickbacks flowing to the House of Saud -- just the further perpetuation of the royal family's corrupt rule.

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Sasha Lilley is Research Coordinator/ Editor at CorpWatch and a Producer for Pacifica Radio's KPFA.