Police: we were bugged in effort to halt BAe Saudi arms inquiry

The PM's defence that stopping a Serious Fraud Office investigation was 'in the national interest' is unravelling

Detectives investigating alleged corruption in BAe's dealings with Saudi Arabia believe that the probe was being bugged, The Independent on Sunday has been told. A source close to the investigation made the remarkable claim as Tony Blair's defence for stopping it on the grounds of national interest began to unravel.

The head of the Serious Fraud Office (SFO) disputed the official claim that the investigation was unlikely to result in charges. Robert Wardle said he had a "different view" from Lord Goldsmith. The Attorney General told Parliament on Thursday that he had agreed to close the case after he had "obtained the views of the Prime Minister and the Foreign and Defence Secretaries" on the effect the probe was having on Anglo-Saudi relations.

But in fact Tony Blair personally took charge of efforts to pressure the Attorney General to drop the probe. He ordered supportive assessments from the Ministry of Defence and the Foreign Office. These were then presented to the head of the SFO and formed part of Lord Goldsmith's "public interest" justification for calling off the probe.

The Prime Minister's determination to stop the SFO investigation has left the detectives working on the case furious. It was the fact that the probe was progressing well that caused its closure, they believe. Some 15 officers from the SFO have been working for more than three years on allegations that BAe bribed foreign officials. The investigation, led by assistant commissioner Helen Garlick, was about to take possession of banking documents in Berne, Switzerland.

One senior figure who had been helping the SFO said the investigation's security had been repeatedly compromised. "I was told by detectives that the probe was being bugged. They had reached this conclusion because highly confidential information on the inquiry had been reaching outside parties."

The claim will fuel suspicions over the forces brought to bear on the SFO to call off its investigation since BAe's chief executive, Mike Turner, was forced to deny claims the company had used a £60m slush fund to bribe Saudi officials. The alleged fund arises out of the Al Yamamah contract secured by Margaret Thatcher. It is said to have earned BAe Systems, Britain's biggest defence firm, and its predecessor British Aerospace, £43bn over the past 20 years.

Investigators were about to gain access to Swiss banking documents that, they believed, could have provided strong evidence of corruption. Last month Mr Turner said the Saudi government had halted commercial talks over the £10bn Eurofighter deal because of anger over the SFO inquiry. It is believed that the story was orchestrated by Lord Bell, who has run a PR campaign on behalf of the defence firm and the Saudi royal family.

It was claimed scrapping the contract for 72 Typhoon fighters would threaten 50,000 jobs. But international law forbids countries from using commercial considerations to exempt firms from anti-corruption prosecutions.

The exemption helps explain why Mr Blair ordered the preparation of a special Cabinet Office report, arguing that Britain's security was at stake. Whitehall sources say Downing Street was keen that Des Browne, the Secretary of State for Defence, and Margaret Beckett, the Foreign Secretary, shared responsibility for the decision to scrap the inquiry. But they were only asked for tightly defined assessments of the effects of a downturn on defence and foreign relations.

Yesterday Mr Blair said: "Our relationship with Saudi Arabia is vitally important for our country in terms of counter-terrorism, in terms of the broader Middle East, in terms of helping in respect of Israel and Palestine. That strategic interest comes first." He said the probe would have led to years of "ill feeling between us and a key partner and ally and probably to no purpose".

Campaigners will decide tomorrow whether to mount a legal challenge.