WORLD: US probes Saudi-linked UK arms firm

The British and US governments are on a diplomatic collision course
after the US Department of Justice launched a formal investigation into
allegations of corruption at defence company BAE Systems.

The US investigation will scrutinise BAE's dealings with Saudi Arabia to
expose an account allegedly held by the Bank of England that is used to
facilitate Saudi payments for arms.

The British Government refuses to acknowledge such an account exists.

Gordon Brown, who becomes prime minister overnight, could face a
diplomatic crisis in the early days of his leadership if the Department
of Justice demands information on the account.

Turning down a DoJ request for help in a corruption inquiry could be
embarrassing for Mr Brown and damage Britain's reputation.

British defence sources and government officials yesterday said the
Ministry of Defence, which allegedly runs the account, was seeking legal
advice on how to proceed.

The decision to investigate is potentially devastating for Britain's
largest defence company.

BAE gets 43 per cent of its business from the US and, if it is found
guilty, the company could face enormous fines or be barred from new US
defence contracts.

The company told the stock market it had received notification of the US
investigation yesterday morning. Its share price fell 11 per cent in
early trading and closed with pound stg. 1.2billion ($2.8 billion) wiped
off its capitalisation.

The Times reported last month that the DoJ was assessing whether it had
jurisdiction to look into BAE's dealings with Saudi Arabia after a
similar investigation by the British Serious Fraud Office was shut down
for reasons of national security.

Allegations of corruption have dogged the pound stg. 43 billion
al-Yamamah oil-for-arms deal, with BAE accused of running a $US100
million ($120 million) slush fund to entertain Saudi royals and pay bribes.

The DoJ is thought to be looking into payments of more than pound stg. 1
billion made by BAE to Saudi officials, including Prince Bandar bin
Sultan, a former ambassador to the US.

The payments are understood to have come from an escrow account held at
the Bank of England and merely transferred through BAE's financial system.

BAE and Prince Bandar have denied the payments were bribes and insist
the transactions were agreed on by the Saudi and British governments.

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