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SM0378 Ethics and Governance Summative Assessment: a case study about BAES and the SFO

From date-consecutive articles from The Times, written by Tom Baldwin, Christine Buckley, Sam Coates, Miles Costello, Steve

Hawkes, Angela Jameson, Dearbail Jordan, Erick Kabandera, David Leppard, Robert Lindsay, Miranda McLachlan, Dominic

O’Connell, David Robertson, Alex Spence, Martin Waller, Karl West and Michael Woodhead; and an ‘opinion piece’ by Richard

Dowden (Royal African Society)

Introductory Summary (You may disregard the italicised material (pages 1-3). It adds little to the case.

However, you may benefit from the quick survey it provides. In your responses, use only pages 3-17.)

BAES plc is the United Kingdom’s largest arms manufacturer, with 100000 employees. Among its

products, some of which are identified in this case study, are military ‘fighter’ jet aircraft such as the

‘Tornado’ and ‘Typhoon’ –named like stormy winds because of their destructive force when deployed

in air-to-air and air-to-ground attacks. ‘Hawk’ and ‘Gripen’ (a fighter made by Saab, a company 20% of

which BAES owns) are the names of other fighter jets, presumably because they are like birds of

prey. The acquisition of Armor Holdings by BAES in 2007 means that it also produces Humvees.

GRIPEN HUMVEE

BAES sells equipment and services to UK Armed Forces but also exports them to other governments

worldwide. This case study concerns the way BAES won contracts with foreign governments, notably

those of the Czech Republic, Qatar, Romania, Saudi Arabia, South Africa, Tanzania and the USA.

The following display identifies senior directors of BAES (known before 1999 as British Aerospace):

You will respond to the tasks in the assessment after exploring the complex arrangements that BAES

made to secure contracts with foreign governments, through subsidiaries like Novelmight, Poseidon

Trading Investments, Red Diamond Trading and other partners like Envers, Merlin International and

Kayswell Services. You will notice that many of these entities were registered ‘offshore’ in the British

Virgin Islands (BVI). For every one person in the BVI population, around forty foreign companies are

[Summative Assessment Case Study] [SM0378 Ethics and Governance] [Semester 1 2011-2012]

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registered in this Caribbean paradise. You will examine the role of authorities such as the UK’s

Serious Fraud Office (SFO) and National Audit Office (NAO), and the USA’s Department of Justice, in

the investigation of alleged offences by BAES. You will consider judgments made by a number of

British and American judges about the sort of offences that BAES admitted and those it denied.

You will also consider work done by an eminent former Lord Chief Justice of England and Wales to

evaluate the conduct of business by BAES. You will encounter the views of UK and other politicians

and non-government organizations concerning the validity or invalidity of the methods adopted by

BAES; and concerning the validity or invalidity of decisions by the authorities to scrutinise (or not) the

conduct of BAES and of foreign governments, politicians and officials in their dealings with BAES.

A lot of individuals are named in the case. They may or may not be blameworthy or praiseworthy.

They include: Wafiq Said, Mark Thatcher, Sir Colin Chandler, Norman Lamb, MP, Nick Cunningham,

Sir Menzies Campbell, MP, Wilbroad Slaa, Timothy Langdale, QC; Gavin Cunningham, Nick Hildyard,

John Bredenkamp, Sailesh Vithlani, Victor Temple, QC, David Perry, QC, Clare Canning.

In your Working Papers, you may wish to list all or some of them in a directory of names (who’s who),

which may help you to avoid confusion of one person with another. Do not include such a list in your

assignment, not even in an appendix. (No appendix is allowed.) If you include a list of names, they will

affect the word count of your responses. An easy way to compile a directory is to use the ‘binoculars’

icon in Microsoft Word to navigate the text of the case electronically, so you can quickly find them.

It is for you to decide whose conduct and utterances should be of interest to you.

Background information about government departments, political offices and holders of political office

A number of political offices and government departments in the United Kingdom (UK) and elsewhere

are identified. Government departments identified in the USA are: 1. Justice and 2. Defense.

The head of the UK government is called the Prime Minister. Margaret Thatcher was Prime Minister

(PM) from 1979-1990; Tony Blair was PM from 1997-2007; and Gordon Brown was PM from 2007-

2010. Political leaders of other countries identified in the case include Benjamin Mkapa, President of

Tanzania from 1995-2005 and President Thabo Mbeki, President of South Africa from 1999-2008.

Senior members of the UK government are: the Foreign Secretary, in charge of the UK’s foreign

policy; the Chancellor of the Exchequer, in charge of its finances; the Secretary of State for Defence,

in charge of military issues; the Secretary of State for Justice, in charge of the legal system; and the

Attorney-General, another senior member of the UK government in charge of legal system).


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Robin Cook was Foreign Secretary from 1997-2003, when Tony Blair was PM; Gordon Brown was

Chancellor of the Exchequer from 1997, until he replaced Tony Blair as PM in 2007; Lord Goldsmith

was Attorney-General from 2001-2007; Jack Straw was Justice Secretary from 2007-2010.

Michael Heseltine was Defence Secretary from 1983-1986, when Margaret Thatcher was PM.

Ministers in the UK government, like Alan Johnson (of the Department of Trade and Industry) and

Jonathan Aitken (in the Ministry of Defence), are subordinate to Secretaries of State.

Robert Wardle was Director of the SFO from 2003-2008. Richard Alderman succeeded him in 2008.

Judges identified in the case are: in the UK, Mr Justice Bean; in the USA, Judge Bates; and in Qatar,

Lord Woolf, who used to be Lord Chief Justice of England and Wales, from 2000-2005.

Members of the royal family of Saudi Arabia, identified in the case, are the Saudi Ambassador to the

US, the Prince Bandar bin Sultan; and the head of the Saudi Royal Air Force, Prince Turki bin Nasser.

The Case Study: “Our people understood why the decision had to be made.” (Robert Wardle)

13 November, 2006

In January, 1997, the chief executive officer (CEO) of British Aerospace (BAe), backed Tony Blair to

become Prime Minister of the UK. Many business leaders did the same. Mr Blair was elected PM in

May 1997. Robin Cook, the new government’s Foreign Secretary, strongly disapproved of Sir Dick’s

influence on Mr Blair. Mr Cook wanted to promote an ‘ethical foreign policy.’ In 1999, BAe merged

with Marconi Systems. The new firm was called BAE Systems (BAES). Mr Blair seemed to act like a

salesman for BAES, trying to persuade the Czech Republic to buy Gripen fighter jets, worth $1bn.

In 2001, Gordon Brown, Chancellor of the Exchequer was furious that Tanzanian payments to BAES

for a military air traffic control (ATC) system relied on debt relief that was meant to enable spending

on Tanzanian education. A Liberal Democrat MP, Norman Lamb raised the issue. Alan Johnson, a

minister in the Department of Trade and Industry, replied: “The Government has no evidence the deal

was corrupt.” The World Bank said Tanzania’s purchase of a £28m system at least four times dearer

than civilian radar was a “waste of money.” Benjamin Mpaka, Tanzanian President till 2005, said: “No

one showed me any evidence [of wrongdoing].”


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21 February, 2007

The ‘Al-Yamamah’ contract for the sale of BAe1 Tornado fighter jets was the largest export order ever

for a UK company. ‘Al-Yamamah 1’ was signed by Saudi Arabia’s Prince Bandar bin Sultan and

Britain’s Secretary of State for Defence, Michael Heseltine, in 1986. A contract for the sale of more

Tornado jets (‘Al-Yamamah 2’) was agreed in 1988, taking Al-Yamamah sales over $43b. Margaret

Thatcher, PM from 1979 to 1990, was determined that the UK would win the order. Rumours began in

1986 about huge payments made to middlemen like Wafic Said, the billionaire benefactor of Oxford

University’s Business School. Mrs Thatcher’s son, Mark, was later accused of taking commissions,

allegedly £12m, for helping to set up the deal. Allegedly, he was a back-channel negotiator for Mr

Said. Jonathan Aitken, a UK Defence Minister, was involved in negotiating the Al-Yamamah contract.

Mr Aitken was imprisoned for perjury, because he claimed his wife paid the hotel bill when the couple

spent a weekend at the Paris Ritz. She did not. Wafiq Said was at the Ritz during the same weekend.

In 2004, the Serious Fraud Office (SFO) began investigating BAES’s alleged £60m ‘slush fund’ that

allegedly paid for prostitutes, Rolls-Royces and Californian holidays for members of the Saudi royal

family. The main alleged recipient was Prince Turki bin Nasser, head of the Saudi Royal Air Force. In

September 2006, the Saudis announced a plan to buy 72 BAES Eurofighter Typhoons to replace its

Tornados in a new deal (‘Al-Salam’) worth £20bn to BAES. In November 2006, when the SFO got a

Swiss judge to force Swiss banks to let it investigate Saudi-linked Swiss bank accounts, the Saudis

threatened that the Al-Salam deal would not proceed. They also threatened to stop cooperating in the

‘War on Terror.’ The PM said the UK’s national interest faced “complete wreckage” if the investigation

continued. The Attorney-General, Lord Goldsmith, said that the SFO inquiry would be discontinued:

first, because there was insufficient evidence of corruption; and, second, to protect national security.

A National Audit Office (NAO) investigation into the Al-Yamamah deal found that the UK government

had paid no bribes, but the NAO’s 1992 report had been suppressed because there were fears that its

publication would offend the Saudis and put continuing trade relations at risk. However, documents

detailing the cost of Al-Yamamah Tornados were accidentally released, including a telegram from Sir

Colin Chandler, then head of the Defence Export Council. It shows that the price was increased by a

third to £21.5m each, an extra £600m. Sources allege that it was members of the Saudi royal family

who suggested this price increase, simply to get their kingdom’s cash diverted into their own Swiss

bank accounts. Other sources say the higher price was only kept secret because the Saudis asked for

a weapons upgrade that it wanted to hide from Iran and Israel. Middlemen almost certainly were paid,

which was perfectly legal until an anti-bribery law was enacted in 2002.

23 February, 2007

1 The company has been known as BAES since 1999. It will be referred to as BAe only on this page and on page 13, because in this paragraph and on page 15, the dates 1986, 1993 and 1998 are specified. [Summative Assessment Case Study] [SM0378 Ethics and Governance] [Semester 1 2011-2012]

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Mike Turner, the Chief Executive Officer (CEO) of BAES, yesterday complained about the SFO’s

investigations into allegedly inappropriate payments to win contracts in deals with Romania, Qatar,

South Africa, Tanzania and the Czech Republic. He says BAES is innocent and wants the inquiries

completed as quickly as possible. Mr Turner said: “We are fully complying with all the SFO’s requests.

We are acting in a responsible and dignified way and we are very proud of this company. We think it

is unfair and unjust that our reputation is being affected.”

02 May, 2007

Last week, it emerged that the US complained formally to the British Government over the decision

last December to stop the Al-Yamamah investigation. The SFO and the US Department of Justice

have discussed BAES payments to Red Diamond Trading (RDT), a BAES subsidiary registered in the

British Virgin Islands (BVI). If the Department of Justice Corporate Fraud Task Force can show that

transmissions from RDT entered the USA, BAES could be penalised under the US Foreign Corrupt

Practices Act. If convicted, companies can be fined, forced to surrender profits from dishonest deals

and barred from US government contracts. The executives of convicted companies can be jailed.

13 May, 2007

The Swiss federal prosecutor's office said it is investigating money laundering involving BAES.

BAES’s money, allegedly, was paid into accounts linked to its ‘offshore’ subsidiaries.

BAES said: "We are committed to the highest ethical standards. Our ethical policy is underpinned by

strict compliance and assurance processes. We will not tolerate bribery."

11 June, 2007

Prince Bandar bin Sultan, former Saudi ambassador to Washington, denies that he got £1bn from

BAES. The Prince said today that allegations made in The Guardian, about his role in Al-Yamamah

and an account at Riggs Bank “are not only untrue but grotesque in their absurdity. Further, it can be

stated categorically that BAES was not party to the account.” He says the bank account was not his

own but the Saudi Government’s, audited annually by the Saudi Ministry of Finance: “I required and

obtained all requisite Saudi Government authority to disburse any funds from the Riggs account.” He

said that the Saudi account had been reviewed by US authorities: “No wrongdoing was found.”

BAES awaits regulatory approval in the US to buy the Humvee maker, Armor Holdings.


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11 June, 2007

Newcastle-born Lord Woolf, 74, was Britain’s most senior judge, the Lord Chief Justice of England

and Wales, till he retired in 2005. He chairs the Bank of England’s Financial Markets Law Committee.

In February, he became President of the Qatar Financial Centre Civil and Commercial Court in Doha.

BAES has asked Lord Woolf to lead an independent panel of investigators, who will inquire into

BAES’s ethical standards and conduct. However, Lord Woolf will not examine Al-Yamamah. His

inquiry is likely to centre only on the more recent Al-Salam contract. The SFO is still investigating

BAES’s conduct in the Czech Republic, Romania and South Africa. It would be inappropriate for the

Woolf Panel to inquire into deals with these countries, while SFO inquiries are still in progress.

Allegedly, in 2001, middlemen (called ‘advisers’ by BAES) helped BAES win a contract worth £1b by

ensuring that the Czech Republic did not buy American fighter jets; in 2003, allegedly, a Romanian

politician got £6m to help BAES win a £116m contract from his government to refit two ships, sold to

BAES by the MoD for only £200k; in South Africa, in 2001, £75m was allegedly paid to advisers. The

SFO is also examining a related £1.6b deal to sell Saab Gripen fighter jets to South Africa. BAES

owns 20% of Saab and advisers helped seal the deal. The SFO thinks advisers bribed South African

officials and ministers to fix the deal. A deal for Hawk training jets and Gripen jets in 1999 was worth

£2.3b. Documents submitted to South African courts say middlemen got £115m in commissions.

BAES said: “As with all our business, we regularly audit arrangements [with advisers] to ensure

nothing improper is taking place and that we are receiving value for money for advisers’ knowledge.”

12 June, 2007

According to BBC1’s Panorama programme last night, MoD officials in Whitehall processed quarterly

invoices from the former Saudi Ambassador to the US, the Saudi Prince Bandar bin Sultan, for

“support services” related to the Al-Yamamah contract, and passed them on to BAES, which then

transmitted payments to accounts in Riggs Bank.

15 June, 2007

The Woolf panel will only check whether existing procedures comply with anti-corruption laws. Woolf

will, under his terms of reference, examine current policies. Lord Woolf said: “It is of importance to

BAES and the [UK] that BAES’s ethical standards are irreproachable. I am agreeable, at BAES’s

request, to [chair] a wholly independent committee of unquestionable integrity to ascertain whether

this is the case and, if [necessary] to identify improvements BAES needs to make.”


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The Campaign Against the Arms Trade said: “There will not be full understanding without looking into

the past.” Norman Lamb, MP, said: “[to omit past deals] suggests BAES has something to hide.”

Mike Turner, CEO of BAES, said: “We want to be in a position to provide customers, investors,

employees and communities [with] further assurance that our policies, ethics and business conduct

are subject to continuous improvement and set the pace for the international defence industry.”

The US Department of Justice is thinking about mounting its own investigation into allegations that

BAES bribed Prince Bandar bin Sultan, paying him £120m a year for facilitating Al-Yamamah.

Incrimination could prevent BAES’s acquisition of Armor Holdings and further Pentagon2 contracts.

16 June, 2007

Lord Woolf rejected claims that his inquiry’s terms of reference mean that it is bound to be uncritical: “I

am looking at the situation today and I will look at the standards adopted by the company today and I

will look at them with a critical and independent eye. I want to see whether the company is conducting

the business ethically now and, if it is not, to tell the company how it can [improve].” Dick Olver, the

BAES chairman, said he will adopt all of the Woolf Panel’s recommendations.

26 June, 2007

BAES has revealed that the US Department of Justice will launch a fraud investigation into BAES. At

the weekend, Mike Turner had seemed to expect the Department of Justice not to investigate: “We’ve

done nothing wrong. I think the Department of Justice is more robust [than the SFO] about standing

up to the press. Just because [there are] accusations, you don’t have to start an investigation. This

‘legal, illegal’ stuff is just absolute bloody nonsense.”

A spokesman for the Campaign Against the Arms Trade, said: “We welcome the Department of

Justice’s decision but it is appalling that [it is the United States] that has to investigate.”

Nick Cunningham, an analyst at Panmure Gordon, said: “The reaction is to mark the shares down but

the Armor acquisition is already on its way and, because they really want their armoured vehicles,

business with the US will not be affected. They’re not going to stop buying them [BAES’s Humvees]

because they think [BAES have] been a bit naughty. Boeing, a couple of years ago, bribed a top US

official and stole trade secrets from Lockheed. It had no effect on their business. If I were a BAES

manager, I may be worried but as a shareholder there is no need to worry at all.” Shares in BAES fell

more than 10%. The US last week approved its £2bn takeover of Armor Holdings.

2 The Pentagon is the nickname of the US Department of Defense[Summative Assessment Case Study] [SM0378 Ethics and Governance] [Semester 1 2011-2012]

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17 July, 2007

Robert Wardle of the SFO says in its annual report that dropping the Al-Yamamah investigation was

his responsibility. Mr Wardle declared: “People say ‘Tony Blair stopped the investigation.’ Well, he

didn’t. I did. I hope people realise we were in a very awkward position. It is my job, independent of the

Government, and certainly independent of party politics, to [choose] whether to investigate, but I can’t

ignore the public interest. We had to make a very tough decision. I very much doubt I could see a way

of having avoided it.” Wardle dropped the case for security reasons, on information he cannot test or

prove – information that is top-secret. He admitted that he stopped the inquiry on “information I am

unable to test” and added: “I can’t [say] whether it is credible. I took the best information, the best

advice I could get. I don’t think anyone was very happy about it. On the other hand, our people are

professional. They understood the decision had to be made but were disappointed, certainly.”

The SFO faces huge embarrassment if the Department of Justice decides to go ahead and prosecute

BAES over Al-Yamamah. “It would not look good but that is some way down the line.” Concerning

other cases involving BAES, Wardle says: “The lawyers and investigators are not pursuing a witch-

hunt. They are saying: ‘Let’s try to find the facts as far as we can and see whether these can be

proved.’ For BAES’s sake and ours, we need to resolve this quickly.”

09 December, 2007

The SFO is to resume a criminal investigation into alleged corruption at BAES. UK government

officials say dozens of senior BAES executives are to be interviewed in the next two months about

alleged bribery involving advisers on contracts in South Africa, Tanzania and Romania. Sir Dick

Evans, who is still a consultant with the company, will be interviewed. Mike Turner will be interviewed,

too. Both adamantly deny any wrongdoing or knowledge of wrongdoing.

06 May, 2008

The High Court has decided that the SFO did not do what the law required, when it dropped the Al-

Yamamah investigation. The court called the SFO decision an “abject surrender” to pressure from a

foreign government. It ruled that the inquiry should resume. The SFO and Government will appeal to a

higher court, the so-called ‘Law Lords,’ to get the High Court judgment reversed.

06 May, 2008

BAES has been urged by Lord Woolf to install tougher anti-corruption measures. He recommends

many ways to improve transparency and raise ethical standards. BAES has already promised in its

latest annual report that senior executives will face higher targets in ethics and safety. These targets


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will make up 12% of potential bonuses for 2008. Dick Olver, the BAES chairman, said: “This report is

an important step toward our objective, benchmark standards of governance in day-to-day business.”

BAES said it will have an action-plan before August but Lord Woolf warned: “Despite progress, the

company has a substantial task ahead. If issues are not promptly addressed they are likely to fester.

Critically, both chairman and chief executive acknowledged to me that the company did not in the past

pay enough attention to ethical standards and to avoiding activities that had the potential to give rise

to reputational damage.” Dick Olver wants to bring in a new, less aggressive corporate culture.

The Woolf Report recommends that BAES should:

1. establish a Corporate Responsibility Committee (CRC) of the main board, to set ethical standards and to oversee all conduct relevant to ethical and reputational risk

2. establish a team, led by a senior executive accountable to the Chief Financial Officer, and responsible for ensuring a group-wide ethical business programme worldwide

3. proactively advocate high ethical standards, including openness and transparency

4. make all ethical policies and procedures publicly available and easily accessible

5. develop, publish and implement a global code of ethical business conduct, including specific behavioural expectations for managers, to take precedence in any dilemma

6. in the medium term (3 years), develop systems to achieve audits of ethical and reputational risk as thorough as audits of financial risk and set up processes to evaluate all business risks

7. make the Internal Audit function responsible for assessing ethical/reputational risk

8. provide in its annual report a public update to shareholders outlining the findings of external and internal audits of ethical and reputational risk

9. in the medium term (3 years), publish an independent external audit of ethical conduct and management of reputational risk; and do likewise at regular intervals thereafter

10. in their performance appraisals, monitor senior management’s ability to demonstrate high ethical standards

11. in the variable element of their remuneration, pay people according to their ability to demonstrate high ethical standards

12. keep a central register of spending on gifts and hospitality, itemised by individual recipients, by customer, by country and in aggregate, reported annually to the CRC

13. where possible, eliminate facilitation payments immediately, though it may not be possible to do so immediately in some countries

14. report all facilitation payments to the board and develop systems to implement a global policy to forbid and eliminate them completely over time

15. make customers aware of BAES policy regarding gifts before contracts are signed

16. ensure rigorous selection and due diligence in hiring advisers, including face-to-face interviews with BAES lawyers; and make their identity known to potential customers


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07 May, 2008

Lord Woolf says his task was to provide BAES with a set of proposals to improve the conduct of its

business but that it was not his job to determine the legality of past arms deals. He agreed that formal

investigation may be needed: “The past cannot be resolved without some sort of investigation, but the

future is much more important. BAES can either become an ethical company that refuses to get

involved in some contracts; or [take the] risk [of] long-term reputational damage.”

07 May, 2008

Dick Olver said ending the SFO inquiry had definitely been the right decision but he positively wants a

review of the SFO’s inquiry into Al-Yamamah. He wants the SFO to take advice on whether it could

ever have successfully prosecuted BAES. “The new head of the SFO should assemble some QCs

(Queen’s Counsels3) and do a case review. Not reopen the case — a review to find out whether there

really is a case that would ever have had any chance in a court. My belief is: there is no chance.”

He told BBC Radio 4: “What I am concerned about is the case itself which I believe should [have

been] abandoned [not for the sake of national security or trade] but for a different reason, because it

was doomed to failure.” He said the Law Lords found that “as far as they could tell there was indeed

no evidence to say that this was anything other than a legal [payment of] commission.”

07 May, 2008

Anti-arms campaigners were at BAES’s Annual General Meeting (AGM) as ‘one-share shareholders.’

These protesters now account for over half the BAES shareholder audience. Mr Olver told the AGM

that BAES will introduce a new company wide ethical code of practice based on the Woolf Panel’s

report at the start of next year. Mr Olver now wants to address allegations of past corruption. He said:

“Lord Woolf’s report deals with the future but we also need to address the past.”

27 June, 2008

Ian King’s appointment as the new chief executive of BAES suggests there will be little change in

direction. He was BAES’s chief operating officer (COO) and a key member of the team that grew

BAES into one of the world’s largest arms businesses. Many critics thought an external appointment

would help the board ‘clean house’ and introduce a new culture.

He was the only internal candidate. He insisted today that he is focused on implementing the Woolf

recommendations. No doubt he is but it is hard to change a culture from the inside. Mr King started as

a trainee accountant with Marconi in 1976, joining BAES in 1999. He was head of group strategy and

3 A Queen’s Counsel (QC) is a very experienced, very respected and very expensive lawyer[Summative Assessment Case Study] [SM0378 Ethics and Governance] [Semester 1 2011-2012]

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became COO and head of non-US operations 18 months ago. Mr King said: “We are going to see

BAES becoming the most international defence company in the world and we should also be the most

ethically responsible. My big challenge will be to implement the Woolf recommendations and get the

changes into the company’s DNA. I am up for it. We are all up for making changes. The big issue is

reputation and we’re raising that bar very high so that we are a global leader in ethics.”

02 August, 2008

The Law Lords this week rejected the High Court ruling that the Al-Yamamah inquiry should not have

been stopped. BAES’s retiring CEO, Mike Turner, said: “The Law Lords found that the Government

had the right. We have called for a review. I think [such a review would find] we did nothing wrong.”

14 June, 2009

The ‘anti-bribery’ Bill4, backed by Jack Straw, the Justice Secretary, will create a maximum 10-year

jail sentence for offering, promising or accepting bribes. The new law would introduce unlimited fines

for firms that induce "improper conduct." The OECD (Organization for Economic Cooperation and

Development) recently criticised the UK for halting the SFO’s Al-Yamamah inquiry.

07September, 2009

As the SFO seeks to finalise inquiries into BAES arms sales in the Czech Republic, Romania, South

Africa and Tanzania, it is negotiating a possible ‘plea-bargain’5 with BAES. BAES would pay a fine but

not admit corruption. The SFO may just prosecute BAES for improper accounting in its tax treatment

of commissions paid to middlemen. The SFO is said to be willing to do a deal, if BAES accepts a fine

of £500m. However, there is no end in sight for a US inquiry into BAES launched in 2007 by the

Department of Justice. The Department of Justice is likely to insist on a guilty plea. However, it is

unclear that the Americans have sufficient evidence to prosecute BAES over Al-Yamamah.

BAES said: “Our view is that the interests of the company, as well as all of its stakeholders, including

the general public, are best served by allowing the investigations to run their course. The company is

working with regulators to that end and providing access to people, information and premises.”

4 A ‘Bill’ is a proposal submitted to parliament. It becomes an Act of Parliament if all its stages are completed.

5 A plea bargain is a negotiated, cooperative settlement between prosecutors and defendants in criminal trials. The defendant agrees to make certain admissions in return for a less severe penalty than the penalty that would have been imposed if it were uncooperative.[Summative Assessment Case Study] [SM0378 Ethics and Governance] [Semester 1 2011-2012]

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01 October, 2009

BAES has repeated that it always acted “responsibly,” based on guidance from legal advisers: “If the

director of the SFO obtains the consent that he seeks from the Attorney-General and proceedings do

commence, the company will deal with any issues raised, in court if necessary.”

Sir Menzies (‘Ming’) Campbell, a senior British politician, said the implications of prosecuting BAES

are “serious, not just for BAES but for Britain’s defence capacity. The company is the main contractor

for the Eurofighter, aircraft carriers, the Joint Strike Fighter and other significant procurements. These

developments would have a considerable impact on them all.” He said prosecution could give

“protectionist” US politicians a pretext to block UK exports.

02 October, 2009 (LEADING ARTICLE6)

“The arms trade is not a special arena with different rules. Woolf said ‘there are contracts not worth

having [which] will do long-term damage to the company.’ The decision to abandon the Al-Yamamah

investigation was a colossal failure of Tony Blair’s [government]. Allegations were brushed aside by

Mr Blair’s ethically empty argument that ‘our relationship with Saudi Arabia is vitally important.’ Or, as

the SFO declared, with complete disregard for due process, of which it is a custodian: “It has been

necessary to balance the need to maintain the rule of law against the wider public interest.” BAES is a

crucial part of [UK] industry. But the doctrine that nothing should stand in the way of trade does not

stand up. The new head of the SFO, Richard Alderman, is right to force the issue.

BAES now makes it plain that [it understands that] its corporate reputation is essential to its future

profits: after all, the Pentagon, its most important customer, demands probity. [In order] to unearth the

truth, and to make the point that the rule of law, and the demands of ethics, do not disappear just

because arms are being traded, this case now needs to go to court — or be resolved in an explicit

and exacting settlement. It is in the interest of justice, the credibility of the arms industry and ultimately

BAES that it be clear that Britain will not turn a convenient blind eye to bribery and backhanders.”

02 October, 2009

Yesterday, BAES’s shares fell 4.4% - by 15.2p, to 334p, wiping £530m off its market value.

The SFO’s hard line has angered BAES executives, who feel that the £300m plea bargain offered,

including a fine and an acknowledgement that BAES is guilty of corruption, are unacceptable. The

Attorney-General will assess whether there is enough evidence and whether it is in the public interest

6 A leading article, sometimes called an editorial, is one whose purpose is to state the newspaper’s principles, rather than to report the facts.[Summative Assessment Case Study] [SM0378 Ethics and Governance] [Semester 1 2011-2012]

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to prosecute. Her spokesman said: “It is a constitutional principle that, when taking a decision on

whether to consent to a prosecution, the Attorney-General acts independently of government.”

02 October, 2009

Tanzanian politicians are considering their own investigations. “We did not need the [military radar]

facility. We are a poor country and we couldn’t afford it,” said Wilbroad Slaa, a Tanzanian MP. The

$40m that Tanzania paid to BAES equals about half the amount it gets in debt relief annually.

04 October, 2009

BAES have rejected a £300m plea-bargain following advice that they could be sued for misuse of

shareholders' funds. Its lawyers, Allen & Overy, and Linklaters, told BAES that £300m is too much,

given the evidence. They suggest £20m instead. "There was the question of a misuse of shareholder

funds and civil lawsuits by investors if the higher figure was paid," said one senior BAES source.

Directors are understood to be ready to approve the payment of a fine - at the right level - if a suitable

form of words in the plea bargain can be agreed, with some sources suggesting BAES will admit

misdemeanours by agents and middlemen. Executives are worried that a trial would harm BAES's

reputation, regardless of the outcome. The SFO might prefer a settlement, too. A trial could last years.

27 October, 2009

The SFO will miss its own deadline for bringing corruption charges against BAES this week as it

struggles with the complexity of the case. It may trim its charges, just to simplify its task. It assigned

more than 30 staff to the case and hoped to get its paperwork to the Attorney-General by the end of

this week but that will be delayed as the SFO’s QC [Timothy Langdale] must also submit his analysis.

BAES is thought to have ruled out a settlement over £30m. The terms of any plea-bargain would

presumably require that British authorities stop co-operating directly with the Department of Justice.

Sources say the SFO has considered helping the Department of Justice to broaden its own inquiry.

Further involvement by the Department of Justice could really worry BAES. The Department is still

examining the Al-Yamamah case. It is thought to want to widen its inquiry to cover deals in Africa and

Europe. Sources say the SFO has so far resisted US involvement in these, but may reconsider this.

06 February, 2010

Under a plea bargain, BAES will pay £285m, including £255m for the Department of Justice. It will pay

£30m (a £500k fine to the SFO and £29.5m to Tanzania) after admitting accounting irregularities. To

admit bribery would have barred it from contracts in the US and EU. It will admit false statements to

the US Government but will remain eligible for US contracts so long as it cooperates. In Washington,

DC, Judge Bates, said BAES had undermined the “integrity of the global defense marketplace.” The [Summative Assessment Case Study] [SM0378 Ethics and Governance] [Semester 1 2011-2012]

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penalties draw a line under inquiries into deals in South Africa, Romania and the Czech Republic.

Dick Olver said: “BAES very much regrets and accepts full responsibility for past shortcomings.”

The Campaign Against the Arms Trade said: “We are shocked and angered by the SFO decision to

settle. There will be no opportunity to discover the truth behind the deals under investigation.” Richard

Alderman, SFO director said: “This is a first and it brings a pragmatic end to a long-running, wide-

ranging investigation.” A partner at Simmons & Simmons, a City of London law firm, said trying BAES

for corruption would have drained SFO resources, preventing it from pursuing other cases.

08 February, 2010

Richard Dowden, Director of the Royal African Society (OPINION PIECE)

“Tanzania has wasted £21 million [intended for] building schools, roads, clinics and reducing poverty.

Corruption kills more people than terrorism and the drugs trade. As an arms deal was going through,

[South Africa’s] President Mbeki was arguing that his country could not afford the £25 a month drugs

for the 5.5 million South Africans infected with HIV.”

01 March, 2010

A sentencing memorandum filed in the US District Court, says BAES breached the Foreign Corrupt

Practices Act and Arms Export Control Act but has taken steps to placate the Department of Justice.

The document says BAES “no longer employs various members of senior management implicated in

criminal misconduct, though it does continue financial and advisory relations with at least one.” Ian

King, CEO of BAES, said in February that he would keep Dick Evans as an adviser on Saudi Arabia.

Sir Dick got £265,480 for this in 2008 and £246,954 last year.

30 March, 2010

BAES’s annual report shows Sir Dick’s contract was not renewed on February 28. He was its CEO

(1990-98) before becoming chairman (1998-2004). He was not available for comment.

25 October, 2010

The Accountancy and Actuarial Disciplinary Board (AADB) is studying KPMG’s oversight of BAES

from 1997 to 2007, to see what KPMG knew about BAES payments to agents, subsidiaries, and other

connected companies. It will also look at work, like tax advice, that KPMG did for Novelmight, Red

Diamond Trading and Poseidon Trading Investments. A KPMG spokesman said: “We don’t believe

there was any misconduct.” Yesterday, BAES said it had not been told by AADB of any proof of

inaccuracies in BAES accounts. Clare Canning, a partner at Mayer Brown, said: “On the face of it, it is

of limited public value to open investigations where the underlying facts have already been scrutinised [Summative Assessment Case Study] [SM0378 Ethics and Governance] [Semester 1 2011-2012]

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[for] years.” AADB, part of the Financial Reporting Council, is responsible for investigating misconduct

by auditors or accountants in cases affecting the public interest. It can impose unlimited fines.

20 December, 2010

BAES admits paying Shailesh Vithlani, a ‘marketing adviser,’ for securing a £28m Air Traffic Control

radar contract and failing to keep accurate records of the payments to him, but he denies bribery. Mr

Vithlani originally worked for a company acquired by British Aerospace (BAe) in 1993. Sir Dick Evans

personally renewed Vithlani’s contract as a BAe agent in 1998. BAES made over 25 payments to

companies controlled by Vithlani from 2000 to 2005. To hide their purpose, some were routed by

BAES through Red Diamond Trading, a shell company based offshore in the British Virgin Islands

(BVI). Victor Temple, QC, for the SFO, said BAES accepted there was a “high probability” that some

money paid to Vithlani would be used to “favour” BAES in negotiations with Tanzania’s Government.

However, he added that the SFO was not accusing BAES of conspiracy to corrupt Tanzanian officials.

Vithlani could have used the money for legitimate lobbying. Mr Justice Bean refused to sentence

BAES until he knew more, saying the “obvious inference” is that some of the money Vithlani got was

used to bribe Tanzanian officials: “They [BAES] didn’t want to know how much would be paid and to

whom. They just wanted the job done. It has to be clear on what basis I’m imposing a fine. If the

money was for legitimate lobbying, has an offence been committed at all?” He said he thought BAES

intended Vithlani “to have free rein to make such payments to such people as he thought fit in order to

secure the radar contract.” David Perry, QC, for BAES, reiterated that BAES denies corruption. He

said Mr Bean had to sentence BAES for accounting charges it admitted, not unproven corruption.

21 December, 2010

A six-year inquiry ended yesterday with a £500k fine for BAES, for failing to keep proper accounts in

relation to the sale of radar to Tanzania. The fine imposed was so small because it must be deducted

from the £30m BAES agreed to pay as part of a plea bargain with the SFO. The people of Tanzania

will get the rest. Mr Justice Bean issued a stinging rebuke, but said he could only sentence BAES for

accounting charges, not corruption. Mr Bean rebutted the SFO argument that BAES was not

necessarily part of a conspiracy. “It seems [extremely] naive to think Vithlani was simply a well-paid

lobbyist,” he said. Campaigners were disappointed. Nick Hildyard, of Corner House, said: “The SFO’s

use of plea bargains must be reviewed urgently.”

21 December, 2010

Gavin Cunningham, director of forensic accounting at BTG Global Risk, said: “The penalty reflects the

problem of bringing a charge under [s. 221 of] the Companies Act. BAES’s agreement to pay £29.5m

‘for the benefit of the people of Tanzania’ is effectively a civil arrangement, not [a] criminal penalty.


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The judgment expresses astonishment [that] anyone could [be so naïve as to] think the monies [paid

to Vithlani] were legitimate lobbying expenses. This case reflects the inadequacy of the old bribery

legislation which made it very difficult to secure a conviction [for] overseas corruption. I expect the

new Bribery Act to sharpen the SFO’s teeth. When companies associated with the UK fail to have

adequate [anti-bribery] procedures in place, they may find the SFO using the new law against them.”

22 December, 2010

Red Diamond Trading (RDT) is the offshore company that BAES established in 1998 to divert millions

to the middlemen it used in foreign arms deals. The SFO could not prove that BAES knew that the

money which passed through RDT was ending up in the wrong hands. BAES paid Shailesh Vithlani

$12.4m. About $400k was paid to Merlin International, a company Vithlani controlled. $12m was paid

directly to RDT but indirectly to Envers, an offshore ‘shell company’ owned by Vithlani. RDT was so

structured, said the SFO, that “it would be extremely difficult to [see through its secrecy].”

BAES also used RDT to pay John Bredenkamp’s Kayswell Services £26.8m between 2003 and 2005.

Kayswell, a BVI group, calls itself a “marketing adviser to aircraft manufacturers focusing on Southern

Africa.” Mr Bredenkamp is thought to have ‘advised’ on the sale of Gripen fighter jets to South Africa.

According to court documents submitted by the US Department of Justice, BAES paid £135m plus

$14m to agents via an offshore company, thought to be RDT: “BAES established [a BVI] entity to

conceal its marketing advisor relationships, including who the agent was and how much it was paid; to

create obstacles for investigating authorities; and to assist advisors in avoiding tax liability for BAES

payments.” The Department of Justice said that £19m was paid in connection with the sale of Gripen

jets: “BAES made these payments even though there was a high probability that part of the payments

would be used in the tender process to favour BAES.” The Department of Justice also alleges that

BAES gave a Saudi official ‘perks’ [perquisites] worth more than $5m in just nine months.

BAES said it “has systematically enhanced its compliance policies and processes with a view to

ensuring that it is as widely recognised for responsible conduct as it is for high quality services and

advanced technologies.”
