Sir Richard Evans, the chairman of Britain's most powerful arms company, may have been personally complicit in the operation of a 20m "slush fund" designed to bribe Saudi officials, according to allegations contained in a letter by the head of the Serious Fraud Office.
The letter, a copy of which the Guardian has obtained, was sent to Sir Kevin Tebbit, the permanent secretary at the Ministry of Defence, by Rosalind Wright, then head of the SFO, along with detailed documents. She marked it "Strictly private and confidential".
Ms Wright told Sir Kevin that BAE executives might have been helping themselves to the money, in a major fraud.
"According to [an ex-employee], the chairman of BAE, Sir Richard Evans, has been made aware of it, but either is prepared to tolerate it or, conceivably, is in some way complicit".
The SFO said the refusal of BAE to pursue the internal fraud claims might be because "this is a means of covering up corruption".
From the SFO documents and other legal files, the Guardian has been able to put together a picture of a covert BAE operation allegedly stretching over 15 years, claimed to have poured extraordinary amounts of money into the cause of "sweetening" officials in the Saudi regime in London connected to the big Al Yamamah fighter and warships deals.
BAE is even claimed to have paid for a 150,000 house for a young woman, allegedly to please a Saudi royal.
Allegations include the provision of:
first-class plane tickets
Mercedes cars with drivers
unlimited restaurant meals
cup final tickets
TV sets and sound systems
An internal BAE security report referred to allegations of "sex and bondage with Saudi princes".
In one 20-month period at the height of the lucrative arms deliveries, files record BAE handing over more than 8m to a front organisation called Robert Lee International [RLI] set up by BAE to "entertain" top Saudis.
In one month, almost 1m was recorded as being distributed. The arms firm is alleged to have paid more than 20m in total since the late 1980s.
Documents include proposals to liquidate the firm and "restart clean company" to avoid a tax investigation into what was termed "the unusual nature of the expenses/entertaining".
The allegations were put to Sir Richard Evans on Monday. On Tuesday BAE said they needed more time to "evaluate these claims". Publication was postponed to allow them to do so. Yesterday, there was still no comment.
The SFO allegations stem from two sources: files handed over by an ex-employee of Robert Lee International, and a copy the SFO acquired of a five-page 1996 BAE security report alleging internal fraud by staff helping themselves from the slush fund. The report is claimed to have been passed to Sir Richard Evans at the time.
The SFO wanted the MoD's fraud squad to investigate the payments, which, if proven, appear to have taken place behind the backs both of Bae Systems auditors and shareholders.
But Sir Kevin at the MoD is accused of a cover-up. The contents of the SFO letter were withheld from the defence secretary, Geoff Hoon. Last night, the MoD said: "We do not believe the allegations of fraud have any direct relevance to the MoD".
In fact, the ministry administers the government-to-government arms deals, through its Saudi project office. As Rosalind Wright pointed out in the SFO's letter: "Ultimately, these services are paid for by the Ministry of Defence to whom BAE is a contractor for the supply of planes to the government of Saudi Arabia."
MoD officials endorsed the allegedly fraudulent bills for payment by the Saudi government, the ultimate losers.
The Saudi ambassador, Prince Turki Al-Faisal, said: "We were shocked to hear of the allegations..that the Saudi government has been defrauded". They might turn out to be unproved, he said. But the embassy would investigate.
The papers that the SFO sent to Sir Kevin on March 8 2001 included alleged bogus invoices paid out for "visitor support" for Saudi officials monitoring the arms programmes.
Ms Wright wrote: "The amounts involved appear to be very high indeed - sometimes as much as a quarter of a million pounds a month or even more. There is evidence of excessive expenses, hospitality etc and some evidence of assets being used for private purposes_Copies of invoices do tend to suggest extravagance _although whether that is unusual in contracts such as these I am not qualified to judge."
The SFO director hinted at the political sensitivity behind a probe into the 26bn arms deals.
She wrote: "I understand that these contracts are extremely large and of significance to the economy".
She did not yet have enough evidence to justify an SFO inquiry, she said but: "Concerns remain, and I thought it right to draw this to your attention since it is conceivable that government money has been misused. If evidence of financial misconduct is uncovered we would be pleased to look at it again with a view to criminal investigation."
The SFO said investigators would need to see Edward Cunningham, the ex-employee of Robert Lee International. He, wrote the SFO chief, "does appear to be a rational and genuine individual with extensive experience of his industry".
In a tape-recording obtained by the Guardian, Mr Cunningham and a former BAE senior executive can be heard openly discussing the fact that Mr Cunningham's job included "bunging the [Saudi] embassy".
But Mr Cunningham told us the MoD had never approached him. When he asked for a copy of personal data about the allegations, he was sent a letter falsely saying "No trace of any_data relating to you could be located".
Mr Cunningham was paid 20,000 last year to drop an unfair dismissal case, after he wrote a witness statement referring to BAE's "slush fund". A BAE internal minute of a meeting we have obtained recorded that "the situation was now under control" and suggests that alleged improper payments had now been stopped. The plan, it said, was for one of those concerned "to contact EC and square him off".
The silver-haired figure of retired RAF wing commander Tony Winship was a key figure in the RLI operation, as a link man to top Saudis in London. When we asked him about the legality of his "entertaining and hospitality" in view of last year's passage of the Anti-Terrorism Act, which specifically outlaws corrupt payments to foreign public officials, Mr Winship told us: "It's all had to stop since the new regulations came in_It's very draconian now".
While on the BAE payroll, Mr Winship's expenditure was, according to internal files, passed through the books of RLI, owned by a freelance businessman, John Sharp.
Alleged targets of Mr Winship and RLI's generosity included the then defence attache at the London embassy, Gen Abdulmohsen al Bassam; the then air attache, Col Hussein Al-Kahtani; and the then first secretary, Emad Adham. It is not clear from the documents what if any benefits these officials received, and what may have been diverted elsewhere.
One former RLI employee said prostitutes were obtained for other visitors to London. "I remember a group of five Saudi officers coming here. We got them lots of prostitutes. They were paid cash from an RLI float".
Documents we possess allege that Mr Winship's involvement in the purchase of a 30,000 TVR sports car; in arranging signing rights at Barbarella2, a Kensington restaurant, allegedly for Col Kahtani; and in acquiring a 12,000-a-year apartment at Chelsea Harbour.
Files also detail payments by RLI of 18,000 for a year's use of a corporate box at Queens Park Rangers football club; to the Dorchester Club; to the One Ninety restaurant run by fashionable chef Anthony Worrall Thompson; and almost 30,000 a year on a gold credit card. The bill in 2000 for a first-class air ticket to Jeddah for Mr Adham is among recent entries.
The documents suggest that one prominent member of the Saudi royal family, Prince Turki bin Nasser, deputy head of the air force, may also often have had his name misused.
Files record an 80,000 purchase of a yacht, the Faye Samantha, allegedly for "Mr Nasser" and that more than 150,000 of BAE's money was spent on two houses for a young woman, allegedly "as an expression of gratitude" from Prince Turki.
In fact, the yacht ended up in the possession of Mr Winship. Building work and antique furniture for a house in Putney, allegedly on Prince Turki's behalf, also turns out to have been for a house recorded as occupied by Mr Winship.
Mr Winship refused to comment on most of these allegations. But he said BAE's payment for a second house, at Ballygalley, Northern Ireland, had been for a woman "who had been very kind to a Saudi lady". Mr Sharp, RLI's managing director, maintained in a legal statement last year that the woman had nursed Prince Turki's sister, who was dying of cancer.
Mr Sharp said then that "an employee of BAE, Tony Winship, authorised the expenditure". All the detailed allegations against himself and RLI were put to Mr Sharp by the Guardian. Yesterday, he said he would not respond except that: "Any allegation of any illegality...is strenuously denied".
All Mr Sharp's multimillion-pound Saudi "visitor support" bills were reimbursed by BAE, with a 15% surcharge added to give him a profit.
Mr Winship worked for several years with a senior BAE executive, Damian Turner, who according to his own witness statement "managed the relationship with RLI".
Mr Turner, director of personnel and resources for the Al Yamamah contract, subsequently became BAE's chief executive for Saudi Arabia. BAE had no comment on his behalf last night.
RLI is alleged to have had persistent problems explaining its activities to the Inland Revenue. In 1993, for instance, RLI accountants tried to persuade them that BAE was providing "hospitality on a scale that is expected in the Middle East rather than on more modest western lines_The expenditure involved on such hospitality is very large".
Another crisis arose in 1996, when a BAE security officer, former policeman Martin Bromley, investigated RLI. He had been tipped off that some of the money meant for Saudis might have been been fraudulently diverted. Mr Bromley wrote a preliminary report for group security at Farnborough.
He outlined claims of bogus invoices, possible tax and VAT fraud and uncorroborated claims of "blackmail by ex-prostitute over sex and bondage with Saudi princes". These claims were not linked to any of the named Saudi officials.
It is alleged that Sir Richard was informed of BAE security's allegations. But BAE did nothing. Robert Wardle, assistant head of the SFO [now its director] minuted in 2001 that Martin Bromley, having left BAE, had handed over his documents to the SFO.
"Mr Bromley had obtained these papers in the course of his investigation. He said it was reported to his company BAE but for some reason a decision was made not to pursue it. He feels it important something should be done".
Mr Wardle agreed. But when the SFO sent the papers to Sir Kevin Tebbit at the MoD, nothing was done.
Last night Mr Cunningham, said: "I believe there has been a major cover-up".