The firm with a 'back door key to Number 10'

BAE's intimacy with Tony Blair's government was legendary. But the company cannot bank on any favours now, says Andy McSmith

There has always been a school of thought in British manufacturing that if bribery is needed to pull off an export deal and protect British jobs, there is no shame in greasing palms.

It was never more bluntly stated than by Sir Richard Dobson, who was appointed by a Labour Government in the 1970s to run British Leyland, a state-owned company that manufactured arms as well as automobiles. Sir Richard was not pleased when, in 1977, the Daily Mail revealed that the company had a slush fund to oil the wheels of foreign governments. Speaking at a private dinner, he wondered why Leyland should be criticised for "the perfectly respectable fact that it was bribing wogs." Sadly for him, someone at the dinner recorded his remarks, and he was sacked.

Today's BAE Systems executives, no doubt, would never use such racist language, but their private reaction to yesterday's decision by the Serious Fraud Office (SFO) to ask the Attorney General to prosecute the company is probably not all that different from Sir Richard's.

BAE Systems is among the world's biggest arms manufacturers, operating in a milieu where what counts as bribery may be normal practice somewhere else. As the former Labour defence minister Lord Gilbert once said, when it comes to arms deals, "one man's bribe is another man's commission payment."

BAE has worked hard from the outset to maintain good relations with the Labour Government. Their senior executives got on well with Tony Blair, but less well with the former foreign secretary, Robin Cook, who had promised an "ethical dimension" to foreign policy. In 2000, Cook tried to prevent BAE selling spare parts for Hawk fighter jets to Zimbabwe, because the Mugabe regime was intervening in a horrific civil war in neighbouring Congo. He was overruled by the Prime Minister.

"I came to learn that the chairman of BAE appeared to have the key to the garden door to No 10," Cook noted ruefully in his memoirs. "Certainly I never knew No 10 to come up with any decision that would be incommoding to BAE."

The following year, Clare Short, who was then international development secretary, was equally unsuccessful in attempting to block a BAE deal to sell arms to impoverished Tanzania. In the same year, there was political uproar in the Czech republic when the Prime Minister, Milos Zeman, announced that BAE was the only candidate for a £2bn deal to supply 36 supersonic jets, after rival bids by US, French and European companies were dropped. Opposition parties in Prague alleged the deal smacked of corruption and demanded that it be called off.

An even more controversial case involved the decision by South Africa, in 1999, to modernise its armed force in a deal worth £2.5bn, with BAE and firms from five other countries. It became enmeshed in corruption allegations involving, among others, the current President of South Africa, Jacob Zuma. The case against Mr Zuma collapsed when it came to court, but one of his advisers was sentenced to 15 years in prison. Another senior politician was also jailed. The SFO has been investigating BAE's role, in this murky affair, including an allegation that the company had a £100m slush fund.

In 2001, a year after that Hawk spare parts deal, a convention against bribery drawn up by the Organisation for Economic Cooperation and Development (OECD), was incorporated in UK law. The convention bans bribery even where the national interest or good relations between friendly governments are at stake.

This encouraged the SFO to pursue allegations, which BAE has always denied, that the company had used bribes to secure arms contracts in Saudi Arabia. Since 1985, BAE had struck a series of deals with the Saudis, known as Al Yamamah, worth £43bn in total – in return, it was alleged, for £1bn in payments to a member of the Saudi royal family, and restaurant meals, sports cars, Cup final tickets and prostitutes for other Saudi officials.

To the Saudis, this investigation was an insult. In 2006, they threatened to cancel a £10bn contract with BAE for 72 eurofighters. Almost at once, the then attorney general, Lord Goldsmith, concluded that a prosecution had little chance of success and might damage relations with the Saudis, and persuaded the head of the SFO, Robert Wardle, to call it off. The decision was criticised by the OECD, but vigorously defended by Tony Blair.

The collapse of this case is reported to have shattered morale at the SFO. Last year, Wardle was replaced as director by Richard Alderman, a soft-spoken barrister who had headed the investigations department at Revenue and Customs. Under his quiet direction, the fraudbusters stayed on BAE's trail.

But however determined Mr Alderman is to do his job properly, no British government is going to want to see the British arms industry generally, or BAE Systems in particular, held up to disgrace.

Even before the current recession started to bite, British manufacturing had lost a million jobs in 10 years. Earlier this year, engineering employers were fearful that the recession could destroy another 140,000. BAE employs 105,000 people worldwide and its sales exceeded £18.5bn last year.

Even if part of that vast trade is not what Robin Cook would have called ethical, its contribution to Britain's manufacturing base is so valuable that you can bet BAE's top brass will always have a key to 10 Downing Street, whoever is living there.