Page last updated at 16:59 GMT, Friday, 5 February 2010

BAE hopes its SFO settlement marks a new chapter

By Russell Hotten
Business reporter, BBC News

BAE Systems' settlement with the UK and US authorities over wrongdoing closes a chapter in a long-running saga over whether the company was involved in bribery and corruption. But is this the end of the story?

Tornado aircraft
The sale of arms to Saudi Arabia has been worth billions of pounds to BAE

Europe's largest defence firm is paying a heavy financial penalty to try to bring this affair to a close. It is also hugely embarrassing for the company.

In agreeing to settle, BAE is pleading guilty to criminal charges in both the US and the UK. This could have consequences for the company as it tries to win future defence contracts in the US and Europe.

On both sides of the Atlantic, governments have strict rules about awarding deals to companies involved in breaking the law. The company - and its investors - will be watching closely for any fall-out.

But as the company has not admitted to any corruption allegations, the impact on future contracts is likely to be minimal.

That said, BAE always argued that any indiscretions it may have committed were relatively minor - technical breaches of accounting rules or a failure to fully disclose commissions.

While the seriousness of BAE breaches cannot be discounted, the Serious Fraud Office (SFO) has seemingly failed to come up with evidence supporting the more outlandish allegations levelled at the company.

The SFO, too, can claim a victory. Despite criticism for being ineffective, it pursued BAE doggedly. There were reports last year that the office was looking to fine BAE close to £1bn for its wrongdoing.

BAE's total fine is little more than a quarter of that figure. But the £30m BAE will pay in the UK is still thought to be a record for criminal activity by a British company.

'Slush fund'

Allegations that BAE was engaged in bribery and corruption have been around for years.

Some of the claims, such as over the £43bn al-Yamamah arms deal with Saudi Arabia, date back decades. Others, like the controversial contract to provide Tanzania with an air traffic control system, are more recent.

BAE Systems sign
BAE is Europe's largest defence company

There was outrage in 2006 when the SFO dropped its investigation into al-Yamamah, arguing that Britain's national security was at risk.

The SFO had launched the probe in 2004 into claims that BAE ran a "slush fund" that offered sweeteners to Saudi royals and their intermediaries in return for lucrative contracts.

The SFO was accused of caving in to political pressure from the UK government, which was worried about the impact on relations with Saudi. But the SFO denied coming under pressure.

If BAE hoped this was the end of the matter, it was wrong.

Rather than drop its inquiries, the SFO stepped up investigations into other BAE contracts. Controversial arms deals in Tanzania, the Czech Republic, Chile, Romania and South Africa all came under the spotlight.

None of the allegations, though, involved current management, who have tried to introduce new ethical processes and procedures - without ever admitting that BAE committed wrongdoing in the first place.

Woolf review

As part of this process, BAE chairman Dick Olver asked Lord Woolf, a former Lord Chief Justice, to review the company's ethical practices.

His year-long review made 23 recommendations on the way BAE could adopt stronger anti-bribery measures and a global ethical code of conduct.

Although BAE was prepared to accept a limited fine, the company stood firm against admitting guilt for fear of its impact on winning future contracts

"BAE either becomes an ethical company, which involves refusing to get involved in some contracts, or it does not become a fully ethical company reaching the gold standard that we have identified," Lord Woolf said.

He added: "There are contracts that are not worth having and that will do long-term damage to the company, and the company has to accept that."

Critics condemned the Woolf report as a whitewash because it looked only at current conduct, not alleged past misdemeanours.

BAE introduced all 23 recommendations, but any good publicity was swept aside as the SFO's investigation widened and the US Department of Justice stepped up its probe, even briefly detaining two BAE executives who travelled to the US.


Last October the SFO dealt BAE a severe blow by announcing that it would ask Attorney General Baroness Scotland to prosecute the company.

The two sides had been trying to negotiate some sort of plea bargain. Although BAE was prepared to accept a limited fine, the company stood firm against admitting guilt for fear of its impact on winning future contracts.

While Baroness Scotland weighed up the sensitive issue of launching criminal proceedings against one of Britain's most important companies, BAE and the SFO continued to negotiate.

Prosecuting BAE through the courts would not just have been damaging for Britain's biggest manufacturing company, but also intensely embarrassing for the government and Ministry of Defence.

All this has now been avoided.

BAE, the SFO, and the UK government will no doubt hope that one of the most controversial episodes in corporate British history has been resolved.

BAE's critics - and there are many - are unlikely to let the matter rest.

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