BAE fires back at slush fund claims

£20m pot allegedly used to bribe Saudi officials. Company says it operated rigorously within the law

BAE Systems, Britain's biggest defence contractor, was engulfed in sleaze yesterday after allegations that it operated a £20m "slush fund" to bribe Saudi officials in connection with the giant Al Yamamah arms-for-oil deal.

The allegations, which appeared in The Guardian newspaper, claimed the money was channelled into a front company and used to buy prostitutes, sports cars, first-class plane travel, gambling trips and cup final tickets for senior officials within the Saudi regime.

The claims, detailed in a letter from the then head of the Serious Fraud Office Rosalind Wright to the Ministry of Defence, also contained allegations that BAE employees may have been taking money fraudulently from the slush fund by inventing bogus invoices for non-existent services.

The letter also contained allegations that Sir Dick Evans, the BAE chairman and the man who negotiated the original Al Yamamah contract, might have been "complicit" in the operation of the slush fund.

The company failed to deny the allegations but issued a statement. "BAE Systems operates rigorously within the laws of both the UK and the countries in which it operates. BAE Systems vigorously rejects allegations of wrong-doing," it said.

Questioned on the slush fund allegations at a later press conference, Mike Turner, chief executive of BAE Systems, declined to comment or to refute them. "They are old allegations and they are old hat. They are history," he said. "Everything we do is legal and that is all I am prepared to say. Whatever the law is we are legal."

Asked whether BAE would take action against the newspaper, he in indicated that it intended to ignore the allegations. "The more you talk about it the worse it gets," he said.

Sir Dick said he intended to remain as chairman until the company's annual meeting next year. He said the board had begun the search for a successor and headhunters appointed by the company had produced a shortlist.

The claims were made to the SFO by a former employee. They included that BAE set up a front organisation called Robert Lee International (RLI) to "entertain" top Saudi officials. In one 20-month period, BAE allegedly passed £8m to RLI.

Asked what the purpose was of RLI, how much money BAE had paid into it and what the money was used for, Mr Turner declined to comment.

The Al Yamamah contract, signed in the late 1980s, is the most lucrative in BAE's history, worth some £20bn. BAE's first-half results, published yesterday, show its customer support and solutions division - which consists of the Saudi contract - made a £210m profit in the six months to the end of June on sales of £1bn. It bounced back from a £616m pre-tax loss last year to a £56m pre-tax profit.

Sir Dick said that the outlook for the second half was positive, but he added: "We recognise that there is much more to do to deliver acceptable profitable growth and increased shareholder value."

The results also show that BAE's American operations generated more sales than any other division of the company with turnover of £1.36bn - 23 per cent of the group total.

Mr Turner re-iterated BAE's desire to consolidate its North American presence through a ground-breaking transatlantic merger with one of its US counterparts and said it continued to talk to all the major US defence contractors.

Airbus was one of the best first-half performers - BAE has a 20 per cent stake in the European planemaker - producing a profit of £122m, up from £88m last year. BAE shares fell 4p to close at 170p.