[A-List] UK arms industry: slush fund & Saudis

["Michael Keaney" <michael.keaney@xxxxxx>]

The FT has followed the Guardian's pursuit of BAE Systems from a distance.
Whilst in no way overtly critical, there's enough useful information in this
article to justify inclusion here.

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Courting controversy in the desert
The Al Yamamah arms deals have been dogged by claims of foul play for years,
says Mark Odell
Financial Times, September 12 2003

Yesterday's allegations of bribery and corruption in the so-called Al
Yamamah arms deal with Saudi Arabia are just the latest question marks
raised over  two contracts that have courted controversy since the first
deal was secured by the British government in the mid-1980s.

Details of the contracts have remained shrouded in secrecy and to this day,
BAE Systems, or British Aerospace as it was at the time, is still loathe to
talk about them.

The first allegations of foul play came from the French defence industry,
which was left spitting blood after the personal intervention of the then
prime minister Margaret Thatcher snatched the first Al Yamamah contract from
under the noses of BAE's rival Dassault in 1985.

The tactics used by the British government and BAE came under even more
intense scrutiny after the second, larger contract was agreed three years
later.

"Perhaps unsurprisingly, this richest-ever export order seemed to have been
accompanied by unprecedented levels of bribery," Mark Phythian, a lecturer
in politics at Wolverhampton University, wrote in his book The Politics of
British Arms Sales since 1964.

Michael Heseltine, the defence secretary at the time, was quick to defend
the government's role.

He told The Observer newspaper in 1986: "What you have to remember is that
arms sales are commercial warfare at its most acute. Anything goes -- 
rumours, smears, allegations -- you can be absolutely sure that our rivals
are trying to undermine what we have done.

"The Government had no knowledge and no dealings involving commission
arrangements," he added.

Mr Heseltine's line is very much in keeping with the strategy employed by
the government over the Saudi arms deals ever since.

Despite the fact that Al Yamamah is a government-to-government contract, in
which the UK has appointed BAE the prime contractor, the arms-length
principle continues to apply.

The Ministry of Defence, which handles all the payments under the deal
financed by Saudi oil, insisted yesterday that it had not acted on the
letter from the Serious Fraud Office because "we don't believe the
allegations of fraud have any relevance to the MoD".

The use of commissions in defence deals is widespread, however, as defence
officials from  two foreign weapons makers told the Financial Times
yesterday.

"Done that, done that and that," said one, running down a list of items,
which included prostitutes, sports cars and yachts, allegedly provided by
BAE to Saudi officials, and published by The Guardian newspaper yesterday.

In his book Mr Phythian is more specific. He quotes an anonymous "arms
industry source" involved in Al Yamamah as telling him: "When you sell to
Saudi Arabia, you are really selling to the Saudi royal family -- a limited
company with 200 shareholders. It is quite simple. In some countries you pay
import duties of 30 per cent, in others you pay commissions."

One defence analyst said yesterday that securing any large contract in the
Middle East requires the payment of kick-backs. "It is endemic, everyone
knows that, particularly in the Middle East."

The Al Yamamah deals remain a key profit driver for BAE to this day even
though the delivery of equipment ended several years ago. The two deals are
thought to have been worth at least £20bn initially, including spares for
aircraft and the building of air and naval bases for the Saudi armed forces.
But BAE still earns revenues of between  £1.6bn and £1.8bn a year on the
service contracts -- effectively the servicing and maintenance of half of
the Saudi air force's frontline aircraft -- with margins estimated to be as
high as 25 per cent.

The service contracts, largely on the Tornado fighter-bombers, could run for
another 18 to 20 years, which -- even before future equipment orders -- 
would lift the overall value of Al Yamamah close to £50bn.