Page last updated at 15:50 GMT, Friday, 5 February 2010

Q&A: How are arms deals done?

Typhoon fighter
BAE has faced bribery allegations before

BAE Systems is to pay a fine of $400m (£250m) after pleading guilty to conspiring to make false statements to the US government in connection with international arms deals.

The UK's largest defence group will also pay a penalty of £30m after reaching agreement with the UK Serious Fraud Office to plead guilty to breach of duty to keep accounting records.

That charge stems from an $39.5m contract signed in 1999 to supply a radar system to Tanzania.

The news has raised further questions over the way arms deals are done.

How are contracts awarded?

The country that wants to buy the equipment will put out a request for proposal (RFP), inviting tenders from arms dealers around the world.

A current example is the US government's $35bn (£22bn) contract to supply the US Air Force with refuelling tankers, which sparked a bidding war between aerospace giants Boeing and EADS, the parent company of Airbus.

Some contracts can take years to be awarded. When India bought Hawk jets from BAE in 2001, competition for the contract had been running for more than 20 years.

Usually, contracts are between the government of the buying country and an arms company.

However, sometimes they can be country-to-country contracts, depending on the buying country's preference. For instance, BAE's £43bn al-Yamamah deal with Saudi Arabia, signed in the 1980s, was between the Saudi government and the British government.

That deal was also investigated by the Serious Fraud Office for alleged bribery, but the inquiry was dropped in 2006 after the prime minister at the time, Tony Blair, said there was a risk to national security.

What factors are taken into consideration?

First and foremost, the actual product on offer will be scrutinised by the buying country, as well as the price that the arms dealer wants for it.

"Offset" activities offered by the contractor can also make a bid more attractive. For instance, in exchange for a government buying weapons or aircraft, a company could offer to reinvest money into defence industries (and non-defence industries, if they so wish) in that country.

Political relations between countries can play a part too.

There is also 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 say is a pervasive system of paying bribes to get business done.

It has been argued that in the 1980s and 1990s, defence companies could not win contracts without the use of some form of bribery or corruption.

What rules are there governing ethics in arms sales?

In 2001, the British parliament passed the Anti-Terrorism, Crime and Security Act. In relation to the arms industry, it served as an extension to existing corruption laws, banning companies based in the UK from bribing officials abroad.

However, anti-corruption campaigners allege a double standard is being practised. They say the British government only opposes corrupt practices when the UK's own interests are not at stake.

Other countries have their own rules governing bribery.

In the US, the Foreign Corrupt Practices Act (FCPA) of 1977 prohibits corporate bribery overseas.

Have other defence companies faced allegations of bribery?

Yes. 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 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.

Didn't BAE set up an "ethics committee"?

Yes. In 2007, BAE appointed Lord Woolf, former Lord Chief Justice of England and Wales, to head an independent committee to review business practices at the company.

The move came after the BBC's Panorama programme disclosed that BAE had made hundreds of millions of pounds in payments to a leading member of the Saudi royal family, as part of the al-Yamamah deal, although the company said this was not a direct response to the Panorama programme.

Lord Woolf published his review in May last year, urging bosses to adopt stronger anti-bribery measures and a global ethical code of conduct.

The review set out 23 recommendations for BAE, and the firm later announced a three-year programme that will "fully implement and embed" all the recommendations.

One move it has made is to get rid of third-party agencies, which in the past it would have had working on its behalf in other countries.

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