The charges that could torpedo BAE

In any other week, BAE Systems would probably have been treated to an uncommon patch of positive press coverage. At a gala ceremony at Barrow-in-Furness in Cumbria, Europe's biggest defence company launched the UK's first nuclear-powered attack submarine in a decade. The 98-metre vessel is a monumental technical achievement that is more complex, claims BAE Systems, than the space shuttle. To mark the affair, the Duchess of Cornwall arrived by helicopter to name the new boat, called Astute, in front of 10,000 spectators.

Yet the submarine story was torpedoed by explosive new corruption allegations, which emerged last week, that BAE had paid more than £1bn to a Saudi prince in connection with his role in the negotiation of major arms deals struck back in the 1980s.

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For chief executive Mike Turner, who resolutely denies any wrongdoing, the damage to the defence giant's image is worrying. As a big arms seller, BAE can hold out little hope of a sterling public image. However, the charges come amid a raft of other corruption inquiries, seven at the last count, into the group's operations around the globe.

The aim for Mr Turner, then, is to keep the group's worsening public image from hindering its business, which is currently in a particularly delicate position. BAE is closing in on a pair of multi-billion-pound deals in Saudi Arabia and America, its two most important foreign markets.

Both transactions - a £20bn fighter jet sale to the Middle East kingdom and a $4.1bn (£2bn) purchase of an American rival - are vital to the company's long-term health. The brewing corruption allegations threaten not just to derail one or both of those, but a reputation tinged by possible dirty dealings could make it harder for BAE to do business elsewhere in the world just as it tries to expand abroad.

The charges, published by The Guardian newspaper and the BBC's Panorama programme, relate to the £43bn al-Yamamah deal to sell 120 Tornado fighter jets to Saudi Arabia. Signed in 1986, it was the largest arms-export deal ever made by the UK government.

The story alleges that BAE, with the implicit approval of the Ministry of Defence (MoD), funnelled payments of £30m every three months to Prince Bandar bin Sultan, a key player in the deal, for over a decade.

Crucially, the alleged payments are said to have continued for a period beyond 2002, when new anti-terrorism legislation outlawing bribery of foreign officials came into effect.

In a statement, the Saudi prince denied any wrongdoing: "Whilst Prince Bandar was an authorised signatory on the accounts, any monies paid out of those accounts were exclusively for purposes approved by [the Saudi Arabian Ministry of Defence and Aviation (MODA)]. In addition, the accounts in question were audited on an annual basis by the Saudi Arabian Ministry of Finance on behalf of MODA. At no stage have MODA or the Saudi Arabian Ministry of Finance identified any irregularities in the conduct of the accounts."

For Mr Turner, the charges resurrect a story that he thought he had finally put behind the company. Last December, Lord Goldsmith, the Attorney General, announced the Serious Fraud Office (SFO) had dropped a two-and-a-half-year investigation into allegations that the defence group had set up a £60m slush fund, also in connection with the al-Yamamah deal.

The dismissal of the case was done on the grounds of national security. It spurred immediate allegations, however, that the Government had buckled to pressure from the Saudis, who were in the midst of negotiating a new contract for 72 Eurofighter Typhoon jets. The deal is worth at least £20bn. The Saudis had also threatened to stop co-operating on terrorism intelligence with the British Government. In the wake of the decision, the OECD launched its own investigation into the claims.

The SFO, meanwhile, has opened inquires into BAE deals in Tanzania, Chile, South Africa, Romania, Qatar and the Czech Republic. Last month, the Swiss authorities began a probe into money-laundering allegations against BAE in that country.

Throughout the original SFO investigation, BAE never wavered from its line, which stopped short of outright denial and instead held that it did nothing which contravened existing laws at any time.

"We have done nothing that can be in any way construed as breaking the law," says a BAE spokesman. "Any payments we made were done under the signed al-Yamamah contract with the express permission of the Saudi government and, where relevant, the UK government via the MoD. We provided over one million documents to the SFO over the last two and a half years that were reviewed by very senior investigators, but they found there was not enough evidence to continue with the case."

Analysts discount the possibility that the firestorm will lead the Saudis to pull out of the £20bn Eurofighter deal.

Indeed, BAE, which employs more than 4,500 people in the kingdom, has a strong, long-standing relationship with the authoritarian regime, despite its poor record on human rights.

For its part, the City has long taken a jaundiced view of the corruption allegations, seeing the dredging up of details of a deal done 21 years ago as having little to do with the company today. "Why don't we look at when Don Revie [then the manager of the national football team] left England to coach the United Arab Emirates in 1977? Why don't we investigate that? It's a ridiculous example, but that's how ridiculous it's getting," says an analyst speaking on condition of anonymity.

The Campaign Against the Arms Trade will present an oral argument to the High Court later this summer in an effort to force the SFO to reopen the inquiry. Jamie Beagent, the Leigh Day lawyer who is handling the case on behalf of CAAT, says the legal action is about recent infractions, not the events of the 1980s.

"This is not about what happened 20 years ago. It's about what has happened since it became a criminal offence in the UK to pay bribes," he says.

So far, the story hasn't hurt BAE's business. There is a worry, however, that the resuscitation of the possible corruption issues could inspire the American authorities to pick up the ball dropped by the SFO.

Washington took a dim view of the SFO's decision to drop the al-Yamamah investigation and lodged a formal protest in January. Last month, BAE announced the $4.1bn acquisition of Armor Holdings in America. The purchase of the maker of bullet-proof vests and Humvee armour will cement BAE's status as the Pentagon's biggest foreign supplier. Both the US Department of Justice and the Committee on Foreign Investment in the United States are reviewing the Armor deal and could block it.

BAE discounts that possibility, pointing out that the Armor purchase is the 16th it will have made in the US. It is also a much- better known entity to the American government than Dubai Ports, the Middle East group that was forced by American lawmakers concerned about national security to sell six American ports as part of a takeover.

The BAE spokesman says: "We're getting no signals from the US that we'll have a problem on this."

Further reading: To learn more about the Eurofighter, check out 'Eurofighter Typhoon: Storm Over Europe' by Hugh Harkins