The Al-Yamamah deal included the sale of Tornado aircraft
Lord Woolf, the former Lord Chief Justice of England and Wales, is to head an independent review of business practices at BAE Systems.
BBC Business Editor Robert Peston has learned that Lord Woolf is to chair an ethics committee to look into how the defence giant conducts its arms deals.
BAE's move comes after revelations about multi-million pound payments to help it win a Saudi Arabia deal.
It is expected to announce other high profile appointments to the committee.
Last week, the BBC's Panorama programme and the Guardian newspaper disclosed that BAE had made payments running to hundreds of millions of pounds over many years to a leading member of the Saudi royal family, Prince Bandar.
This was part of the Al Yamamah deal to supply £43bn of military equipment, signed back in the 1980s.
Lord Woolf's appointment, which is not a direct response to the Panorama programme, comes as BAE's chairman Dick Olver and the firm's non-executive directors are said to want independent verification that the company does nothing improper when winning defence contracts.
They hope this will restore public confidence in the business, although BAE has refused to officially confirm the review of its business practices.
Prince Bandar has "categorically" denied receiving any improper payments, and BAE said it acted lawfully at all times.
The UK Ministry of Defence, which is alleged to have approved BAE's payments, has said that information about the Al Yamamah deal was confidential.
BAE's payments to Prince Bandar were discovered during a Serious Fraud Office (SFO) investigation.
The SFO inquiry into the Al Yamamah deal was stopped in December 2006 by attorney general Lord Goldsmith, after the government said it was threatening the UK's national security.
The inquiry is thought to have angered Saudi Arabia, to the point where there was a risk that BAE could lose a contract to sell the new Typhoon fighter to Riyadh if it continued.
Despite dropping the Saudi probe, the SFO is still investigating BAE contract wins in Africa, eastern Europe and South America.
Prince Bandar, who is the son of the Saudi defence minister, served for 20 years as US ambassador and is now head of the country's national security council.