Saudi arms corruption case goes to Europe

The Government could face an unlimited fine if found guilty of breaking EU laws, following its decision to drop a fraud investigation into BAE Systems' dealings with Saudi Arabia.

Tony Blair's administration has argued that the Serious Fraud Office (SFO) inquiry into alleged corruption in arms deals with Saudi Arabia would damage national security.

The Liberal Democrats are to ask the EU to investigate after Chris Davies MEP was told by Charlie McCreevy, the Internal Market Commissioner, that failure by an EU state to take action to ensure contracts are obtained fairly would ensure "a serious infringement of EU rules".

"Tony Blair has made Britain look cheap and shabby in the eyes of our European partners," said Mr Davies. "By halting a major corruption inquiry he has turned us into a banana republic, robbing us of any moral authority to speak out about the need to raise standards of governance and business probity."

Mr Davies asked the Commission whether it was permissible "for a member state to sanction, even by way of non-action, the payment of bribes in order to facilitate the secrecy of contracts to the benefit of companies within its territory". The Commission replied that non-action by a member state "would constitute a serious infringement of the EC rules".

"On the face of it the British government may well be in breach of European competition rules. It is a fundamental principle of our membership of the EU that we compete fairly," said Vince Cable, the Lib Dem Treasury spokesman. "If it could be shown that the Government's inaction in this area and the dropping of the SFO investigation gave BAE an unfair advantage, this would constitute a serious breach of the law."