While allegations that Saudi officials have received handsome bribes from British defense contractors over the past two decades have been circulating in the London press for many years, newly leaked details of an investigation by Britain's anti-corruption agency far surpass the claims of even the most radical anti-arms trade campaigners. An investigation that began three years ago as a probe into million dollar shopping sprees and high class call girls for visiting Saudi officials has uncovered billions of dollars in illicit transfers to the Saudi royal family by Britain's largest arms manufacturer, undertaken with the full knowledge of the British government.

Background

Foreign companies that deal with Saudi Arabia have long complained about the necessity of paying "commissions" to Saudi officials in order to win contracts. In the defense sector, the principal beneficiaries have been relatives and associates of Saudi Crown Prince Sultan bin Abdul Aziz, who oversaw the kingdom's lucrative arms purchases while serving as defense minister for over four decades. Sultan's reputation was well established as early as 1970, when the British ambassador in Riyadh noted in a telegram to the Defense Ministry in London that the prince has "a corrupt interest in all contracts."[1]

In the early 1980s, the Saudis embarked on a massive program to upgrade their air force in the wake of the Iranian revolution. Although the kingdom had purchased F-15 and F-5 fighter jets from the United States in the 1970s, congressional opposition to the sale of advanced aircraft to the Saudis led Riyadh to look elsewhere. While it initially appeared that the Saudis were preparing to buy Mirage fighter aircraft from the French, British Prime Minister Margaret Thatcher managed to persuade Sultan to buy British Tornados instead. The reasons behind his change of heart would remain a mystery for over two decades.

Saudi Arabia and Britain negotiated two agreements in 1985 and 1988, known as Al-Yamamah I and Al-Yamamah II, providing for the purchase of 120 Tornado fighter aircraft, Hawk training jets, and other military equipment, as well as even more lucrative contracts for construction of military aviation infrastructure, maintenance, and upgrades. Because the terms of both agreements were kept confidential and the Saudis paid with oil produced outside of their OPEC quota (in exchange for which British government paid cash to BAE), the precise value of the Al-Yamamah contracts was not known to the public until CEO Mike Turner revealed it to be £43 billion [$86 billion at today's exchange rate] in 2005.[2] This ambiguity made it impossible for anyone outside the British and Saudi governments to track the proceeds.

Early on, it was evident that BAE was discretely funneling money back into the kingdom by paying inflated rates for military construction projects to local contractors connected to members of the royal family. In addition, under the the Al-Yamamah offset arrangements, BAE was obliged to invest a percentage of its profits in Saudi Arabia, which was done through joint ventures with similarly well-connected local companies. Two key beneficiaries of these deals were Wafic Said, a Syrian-born businessman close to Sultan,[3] and Muhammad Safadi, a Lebanese businessman close to Sultan's son-in-law, Prince Turki bin Nasser. Both became billionaires as a result.

While BAE steadfastly denied rumors that it had paid bribes in connection with Al-Yamamah, during the 1990s a number of smaller British arms companies acknowledged paying commissions to Saudi middlemen in order to win subcontracts. However, with the notable exception of a $98 million payment by the arms company BMARC,[4] most were small-scale and all were technically legal, as British anti-corruption legislation explicitly forbidding bribery of overseas officials did not come into force until 2002. More controversial was evidence that Saudi money was finding its way back to defense industry executives and British political figures. For example, Mark Thatcher (son of the former prime minister) and then-BAE chief Richard Evans were found to be living in luxurious residences owned by front companies registered at the same address (49 Park Lane) as Said's offices in London.[5]

The Iceberg

In the fall of 2003, The Guardian uncovered the existence of a slush fund operated by BAE to entertain visiting Saudi officials (now illegal under the new anti-corruption law) and reported allegations that BAE officials had dipped into the fund. Public uproar forced British Prime Minister Tony Blair to authorize an investigation into the matter by the Serious Fraud Office (SFO), an independent government agency. In the course of its investigation into the $120 million slush fund, the SFO discovered that BAE had been secretly funneling billions of dollars abroad.

In October 2006 The Guardian published documents accidentally released by the British government to the National Archive (and quickly reclassified) indicating that the price of the 96 Tornado aircraft sold to the Saudis under the Al-Yamamah I contract had been inflated by 32%, a margin that would hypothetically allow for the diversion of £600 million ($1.2 billion) in graft.[6] Since the purchase price of the aircraft themselves paled in comparison to the auxiliary contracts that followed, the obvious implication was that many billions of dollars could easily have been diverted from Al-Yamamah.

Although it would not be revealed publicly until The Guardian broke the story in June 2007,[7] the SFO discovered that at least $2 billion had been wired over the course of at least a decade from BAE to an account at Riggs Bank in Washington, DC controlled by Prince Bandar bin Sultan, the former US ambassador to Washington and son of the Crown Prince.

A second stream of over $2 billion was found to have been transferred by BAE into two offshore front companies registered anonymously in the British Virgin Islands, then funneled into Swiss bank accounts belonging to, among others, Said and Safadi - who was now minister of transportation and public works in Lebanon.[8]

When Said and Safadi were notified by the Swiss authorities that the SFO was requesting access to their accounts, the Saudis quickly began demanding that Blair halt the investigation, reportedly threatening to back out of a deal to purchase 72 Eurofighter Typhoons built by a BAE-led European consortium, which would eliminate thousands of British jobs. When it emerged in early December that the Swiss authorities had agreed to the SFO's request, according to The Financial Times, Saudi Arabia "threatened to withdraw all cooperation on security, including intelligence sharing on al-Qaeda, and downgrade its embassy in London" if Blair failed to call off the inquiry.[9]

The prime minister quickly caved in. Although Britain's leading anti-corruption and anti-arms trade NGOs challenged the decision, most legal experts agreed that the effort was futile. Under the hitherto little-known "Shawcross procedure," the government can halt a criminal investigation if the attorney general determines that it threatens the national interest.

Other Western governments who felt that their defense industries unfairly lost bids to BAE were not so eager to sweep the matter under the rug. In March 2007, the Organization for Economic Co-operation and Development (OECD) expressed "serious concerns" about Britain's halt to the investigation and announced that it would be conducting an inquiry. "Is there somewhere a systemic problem?'' said Mark Pieth, a Swiss legal expert who heads the OECD anti-corruption watchdog, noting that Britain had yet to successfully prosecute a foreign bribery case since it acceded to the OECD anti-corruption convention.[10] It later emerged that British officials lied to the OECD about the findings of the SFO investigation.

In response, London waged a futile diplomatic campaign to have Pieth removed from his position (or, barring that, prevented from speaking publicly about the inquiry), but its efforts hit a brick wall. "The British do not have support from anyone else on this," an OECD source told The Guardian.[11] There were also indications that London waged a smear campaign against the secretary-general of the OECD, Angel Gurria, for his refusal to rein in Pieth. The Economist published an article accusing Gurria of numerous improprieties, while citing unnamed north European ambassadors as fearing that the OECD "may drift into dangerous waters" under his leadership.[12] Britain's ambassador to the UK later admitted having spoken off the record to magazine.

Meanwhile, Swiss federal prosecutors took a look at the undelivered boxes of account statements previously compiled by financial regulators for delivery to the SFO and didn't like what they saw, launching a criminal investigation into money laundering by BAE in May.[13]

The SFO's discovery of the Bandar payments finally surfaced in The Guardian on June 7,[14] sparking an avalanche of international media attention that could not have come at a worse time for the Saudi prince (who had recently fallen into disfavor with King Abdullah). However, the primary Saudi concern is the prospect that details of the Swiss bank accounts will be made public. Since the Sultan family presumably received its cut of the Al-Yamamah proceeds through Riggs bank, it is likely that the Swiss account statements will reveal an itemized list of people who, for one reason or another, Bandar has found it necessary to discretely pay off over the past two decades.

Notes

  [1] "Warplane sale: The secret Whitehall telegram that reveals truth behind controversial Saudi arms deal: Document shows Riyadh paid £600m extra for jets: Evidence points to corrupt payments in 1985 contract," The Guardian (London), 28 October 2006.
  [2] Flight International, 21 June 2005.
  [3] "I benefited because the project led to construction in Saudi Arabia that involved my companies," Said later acknowledged. Interview with The Sunday Telegraph, 18 March 2001.
  [4] A former executive of the arms company BMARC testified in 1999 that his company paid a 15% commission to an associate of Saudi Prince Muhammad bin Fahd to win a $650 million contract to supply helicopter weapons. "The Aitken Affair: Millions in Secret Commissions Paid out for Saudi Arms Deal," The Observer, 22 June 1997.
  [5] "The Mark Thatcher Affair: Saudi contact named as key player; David Hellier profiles the alleged middle-man who became a friend of the Thatcher family," The Independent (London), 10 October 1994; "British Aerospace chief's Mayfair flat linked to fixer in Saudi arms deal," The Independent (London), 2 February 1998.
  [6] "Warplane sale: The secret Whitehall telegram that reveals truth behind controversial Saudi arms deal: Document shows Riyadh paid £600m extra for jets: Evidence points to corrupt payments in 1985 contract," The Guardian (London), 28 October 2006.
  [7] "BAE accused of secretly paying £1bn to Saudi prince," The Guardian, 7 June 2007.
  [8] "BAE enquiry: Money trail: Secret flow of £1bn through accounts," The Guardian, 15 December 2006.
  [9] Saudis' al-Qaeda threat killed BAE probe," The Financial Times, 18 December 2006.
  [10] "OECD fears weakening of U.K. bribery stance," The International Herald Tribune, 15 March 2007.
  [11] "UK tries to sabotage BAE bribes inquiry: Attempt to oust legal expert heading European corruption investigation," The Guardian, 24 April 2007.
  [12] "An angel flies into some flak; Trouble at the OECD," The Economist, 21 April 2007.
  [13] "Swiss confirm investigation of BAE; U.K. military contractor faces scrutiny on possible laundering," The International Herald Tribune, 16 May 2007.
  [14] "BAE accused of secretly paying £1bn to Saudi prince," The Guardian, 7 June 2007.