British arms company BAE Systems has been accused of maintaining a $20m (US$32m) 'slush fund' in order to bribe Saudi officials, from which company employees are alleged to have fraudulently withdrawn money. WMRC Perspective Significance Corruption is known to be a problem in Saudi Arabia, with foreign companies doing business in the kingdom frequently believed to pay middle men and government officials when negotiating contracts. Implications While BAE has denied the accusations of bribery, the case highlights the need to 'sweeten' Saudi middle men when negotiating contacts with the kingdom. Outlook Saudi business practice is unlikely to change any time soon, given a lack of legislation or high-level commitment to stamping out corruption. Rather, the onus is on Western governments to clarify legislation differentiating between 'facilitation' payments and bribes.

US$32m over 15 Years

Britain's The Guardian newspaper today published a report alleging that the UK's largest defence contractor, BAE Systems, over a 15-year period paid some $20m into a 'slush fund' used to bribe Saudi officials in London involved in the lucrative arms trade between the two countries. By channelling the money into a front company, Robert Lee International, the fund is alleged to have been used to provide a range of services and goods to Saudi officials, including cars, yachts and home entertainment equipment. However, the more serious allegation appears to be that BAE executives fraudulently used the fund for personal expenses. The paper suggests that the company's chairman, Sir Richard Evans, knew of the fund's existence and of the allegations of fraud by BAE employees.

BAE's Chief Executive Mike Turner today denied the allegations, stating: 'We operate in line with all the laws of the United Kingdom and all other countries we operate in'. Meanwhile, a statement by an employee of the front company indicated that the fund has been closed down, in line with last year's Anti-Terrorism Act, which outlaws corrupt payments to foreign public officials.

MoD Ignored Allegations

According to The Guardian, the allegations first came to light after a former employee of Robert Lee International handed over files to the UK's Serious Fraud Office (SFO), and the SFO obtained a five-page BAE internal security report from 1996 alleging that staff had committed fraud by taking money out of the slush fund for personal use. However, although the allegations were passed from the SFO to the Ministry of Defence (MoD) in March 2001, no action was taken against BAE. The SFO's letter containing the allegations was apparently withheld from Defence Secretary Geoff Hoon and an MoD spokesman said yesterday (10 September) that the allegations had no direct relevance to the ministry. However, the MoD is responsible for administering the government-to-government arms deals, via its Saudi project office. If true, the allegations mean that Saudi government money was spent fraudulently, as BAE is contracted by the government to supply aircraft to the Saudi government and the allegedly fraudulent bills were endorsed by the MoD for ultimate payment by Riyadh. BAE has had a long relationship with the Saudi government and employs more than 2,500 people in the kingdom.

The political sensitivity of the allegations may have been a major reason for the MoD's failure to investigate. As the SFO's director stated in her letter to the MoD, 'these contracts are extremely large and of significance to the British] economy'. The arms industry plays an important role in the UK's economy, with annual sales of about $17bn and the British government accounting for more than three-quarters of purchases - a 20% share of the global arms market makes the UK the world's second-biggest arms exporter.

The arms industry has been involved in a number of scandals in recent decades. In the 1980s, British firms began supplying the regime of former Iraqi president Saddam Hussein, while in the early 1990s UK engineering firm Matrix Churchill attracted controversy when it violated an export ban - with the approval of Conservative ministers - by selling equipment to Iraq that could have been used to build a 'super gun' capable of targeting Israel.

Outlook and Implications

Bribes or 'facilitation' payments are often seen as a 'competitive advantage' by companies operating in tough international markets. It is not only arms companies that have attracted attention for fraudulent practices. Last month, the US Securities and Exchange Commission and Department of Justice began investigations into the telecommunications company Lucent Technologies over allegations that it had violated the Foreign Corrupt Practices Act. The company is accused of bribing a Saudi official with cash and gifts valued at more than US$15m in an effort to win contracts from the state-run Saudi Telecommunications Company (see Saudi Arabia: 26 August 2003: US Investigates Bribery Allegations Against Lucent in Saudi Arabia).

Corruption among Saudi officials negotiating foreign contracts is thought to be widespread. Most deals are believed to require the participation of middle men, who take a large cut of payments, and arms deals are notorious for the need to 'sweeten' Saudi officials. In its most recent report, the anti-corruption organisation Transparency International concluded that the bribery associated with arms deals is even greater than the kickbacks produced by oil and gas contracts. Even among local officials dealing with Saudi citizens, corruption is said to be endemic, due to tribal and sectarian loyalties. Saudi Arabia's oil wealth is part of the problem: by obtaining the bulk of its revenue from oil, the kingdom delayed developing a middle class and solid, transparent political institutions, thus allowing corruption to flourish.

Saudi Ambassador to the UK Prince Turki Al-Faisal has said his government will investigate the allegations against BAE. However, there is little hope of a change in Saudi business practices - namely the need to 'facilitate' contracts by sweetening middle men - any time soon. Although in an effort to reduce the potential for corruption the government passed legislation in 2000 banning ministers from retaining or taking high-ranking management posts in all companies except the state-run oil producer, Saudi Aramco, little appears to have changed (see Saudi Arabia: 3 May 2000: Ministers Banned from Top Company Jobs). Rather, the onus will lie on Western governments to draw a clearer line between 'facilitation' payments and outright bribery (see Global: 21 August 2003: Beating Corporate Bribery: A Company Perspective).

With acknowledgements to World Markets Analysis and Kate Luxford.