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Last Updated: Wednesday, 13 June 2007, 05:10 GMT 06:10 UK
Q&A: Ethics and the arms trade
A Tornado aircraft
The Al Yamamah deal involved Tornado and Hawk aircraft

What is BAE doing?

The BBC has learnt that UK arms group BAE Systems is setting up an ethics committee.

The committee is to be led by Lord Woolf. Till his retirement in 2005 he was Lord Chief Justice - as such, the most senior judge in England and Wales.

His committee's job will be to conduct an independent review of BAE's business practices, to see whether the way it lands arms deals conforms to ethical standards.

Why does BAE think it needs an "ethics committee"?

The company has found itself repeatedly in the spotlight in recent years.

At the centre of the furore has been the firm's part in the multi-billion pound Al-Yamamah deal signed between the UK and Saudi Arabia in the 1980s.

In December last year, a decision by the Serious Fraud Office to scrap an investigation into allegations of kickbacks to Saudi officials triggered a storm of criticism.

(The SFO is still looking into other BAE deals with South Africa, the Czech Republic and several other countries.)

And earlier this month, the BBC alleged that a key feature of the Al-Yamamah contract was a billion-dollar commission paid - indirectly, via government bank accounts - to the former Saudi ambassador to the US, Prince Bandar bin Sultan.

BBC business editor Robert Peston
The decision may be seen by critics as the equivalent of the old chestnut 'so when exactly did you stop beating your wife?'
Robert Peston,
BBC business editor

The upshot is that the company's board, led by chairman Dick Olver, want to clean up the company's image, and need someone whose independence is beyond reproach to do it for them.

But what rules are there governing "ethics" in arms sales?

There are those who would argue that the sale of weapons is fundamentally unethical by definition.

Some, at one end of the political spectrum, would prefer to see all international weapons sales banned. Others might argue that since regulation is ineffective, it might as well be scrapped.

For those seeking a more nuanced approach, one way of judging whether companies in the arms business are behaving ethically, or at least responsibly, is to look at who they sell to.

Overseas arms deals cannot take place without an "end-user certificate", which makes it clear who the final owner will be.

In theory, that stops weapons being sold to countries with poor human rights records, or being passed on to them by the documented buyer.

Campaigners, however, argue that the end-user certificate (EUC) system has too many loopholes.

For example, British firms can freely broker deals between third parties without falling foul of the EUC rules. Alternatively, firms can subcontract the making and shipping of weapons to manufacturers elsewhere, which can also avoid EUC oversight.

And even where there is an EUC, there is no formal system for monitoring compliance by the country that is claimed as the final recipient.

Is this where BAE is alleged to have come a cropper?

No. BAE's problem is not so much who they sell to, as the way they are suspected of sealing the deal.

There is a widespread perception that bribery and kickbacks are rife in the arms business.

Facilitation payments, middle-men's commissions, introduction fees - there are dozens of names for what critics would charge are a pervasive system of paying bribes to get business done.

The US has banned such payments for some three decades under the Foreign Corrupt Practices Act (FCPA) of 1977.

Heavy lobbying from US firms - who argued they were losing business to competitors from less fastidious countries - led to the OECD's anti-bribery convention.

The UK, a signatory to the convention, banned this kind of bribery in 2002.

BAE is forthright in its denials that it has done anything wrong.

In any case, it says its part of the Al-Yamamah deal was signed off by both governments, so if there had been wrongdoing then both London and Riyadh would be well aware of it.

Is BAE the only firm to run into trouble for alleged bribery?

Far from it.

The FCPA was partly triggered by the outcry following huge kickbacks paid to former Japanese Prime Minister Kakuei Tanaka in the early 1970s by US arms firm Lockheed.

In the 1980s, French arms firm Dassault was alleged to have bribed Belgian officials to win a big contract.

Dassault denied bribery - but in leaping to the firm's defence, a French minister protested that commissions were a "normal part" of arms deals.

And much more recently, a former chief financial officer of aerospace giant Boeing admitted that he had helped a senior procurement official from the US Air Force land a job with the firm after she steered several big contracts Boeing's way.

Boeing was banned from Air Force contracts for five years as a result.

So is the ethics committee going to get BAE out of trouble?

That remains to be seen.

It all depends on what Lord Woolf finds, and how the company handles it.

One recent example of a UK firm relying on a committee of the "great and the good" to examine its practices may be instructive.

Energy giant BP commissioned former US Secretary of State and close friend of the Bush family James Baker to look into its behaviour leading up to a disastrous refinery fire in Texas that claimed 15 lives.

The Baker Commission examined BP's practices, rather than its history - and found huge flaws in the way it operated across all its North American operations.

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