Pressure over Saudi allegations mounts as BAE expands in US

BAE Systems, Britain's biggest arms manufacturer, is to face fresh protests today over its alleged bribery of Saudi officials as pressure mounts on the Bush administration to investigate the affair because of the company's growing presence in the US military market.

Protesters from the Campaign Against Arms Trade will hold demonstrations outside the company's annual shareholder meeting in London calling for the reopening of a Serious Fraud Office (SFO) investigation into the bribery allegations. The inquiry was dropped before Christmas on the grounds that it threatened to jeopardise the UK's national security interests and the fight against terrorism.

Meanwhile, at the meeting at the QE2 Centre in Westminster, BAE board directors will face hostile questioning over the company's role in Saudia Arabia where it is the lead contractor on the £20bn Al Yamamah arms-for-oil contract.

The AGM comes just as BAE expands its activities in the US with the £2.1bn takeover of the Humvee armoured vehicle-maker Armor Holdings but also as Congress takes an increased interest in claims that the company bribed Saudi officials involved in Al Yamamah.

Concern is mounting that the international unrest over the UK's decision to drop the SFO investigation will hamper BAE's attempts to expand in the US, where it has just strengthened its position as the Pentagon's biggest foreign contractor with the Armor deal. BAE shares dipped 3 per cent yesterday to 434.5p as the company completed a £750m fund-raising operation to help pay for the deal by placing 174 million shares at 430p.

Washington has already lodged a formal protest with the UK Government over the abandonment of the SFO investigation, following similar criticisms from the Organisation for Economic Co-operation and Development over the UK's poor record on prosecuting bribery of foreign officials.

But Congress is stepping up the pressure on BAE with the House and Senate foreign relations committees threatening to withhold approval for BAE arms deals in the US unless the administration takes a closer look at the bribery claims. The US Justice Department is also said to have taken soundings about whether it can launch an inquiry into allegations that a BAE front company had made payments in connection with overseas arms deals.

BAE has consistently denied breaking any laws relating to bribery and corruption. The group also remains confident the Armor deal will be approved by the US authorities, notwithstanding the heightened "noise" about bribery allegations in US political circles. Walt Havenstein, the head of BAE's US operations, said he did not anticipate any difficulty gaining the regulatory go-ahead for the Armor takeover, pointing out none of the group's previous acquisitions, including its £2.2bn takeover of the Bradley armoured vehicle maker United Defense Industries two years ago, had been denied by the US government.

Were the deal to be blocked because of concerns about BAE's ethical standards it would be a huge blow to the British company. The US is by far the biggest military market in the world with an annual defence budget of $700bn (£352bn). Should the Armor deal go through, it would make the US the biggest single source of BAE's revenues, accounting for 42 per cent of group sales compared with 36 per cent at present.

The fact that BAE went ahead with the Armor acquisition despite the negative headlines in the US probably indicates that it had political approval from the Bush administration for the deal before the announcement. Mr Havenstein said that BAE's "flawless" stewardship of its US businesses accounted for more than anything in the eyes of the US government.

Defence analysts note US arms-makers themselves have not been immune from corruption probes. Boeing was stripped of a $100bn tanker aircraft order two years ago after it emerged the Pentagon official responsible for placing the contract was in negotiations to take up a senior job within the group.

The Armor deal will make BAE the world's biggest maker of land vehicles - a market estimated to be worth $10bn in the US alone.

A question of law: the Al Yamamah contract investigation

Although BAE Systems has always denied acting illegally in respect of the Al Yamamah contract, it has been careful not to deny that payments were made to Saudi officials for "support services".

The value of these "services" is generally reckoned to be have been worth about £60m and involved payments into private Swiss accounts.

The crux of the argument is whether these payments constituted bribes or whether they were made with the consent and authorisation of the Saudi government.

On 14 December last year, the Attorney General Lord Goldsmith said the payments broke down into those which pre-dated the introduction of the 2001 Anti Terrorism, Crime and Security Act which made the bribery of foreign officials a crime; those which continued for a period after the law took effect; and those which continued over a longer period. Lord Goldsmith said that, in relation to the first set of payments, no prosecution could be brought as no law had been broken. In respect to the third set, he said there was "little hard evidence" that they had actually been made. This leaves the second series of payments. He said it would take a further 18 months to complete its investigation, during which time there was a danger "serious damage" could be done to the UK national interest. He also said that such were the obstacles to a successful prosecution "that it was likely that in the end it would not go ahead". These are understood to concern the difficulty of obtaining evidence from Saudi Arabia.