Fraud Office launches inquiry into BAE Saudi arms deal

Inquiry into suspected false accounting. Two arrested in dawn raids. BAE denies being target of investigation

The Serious Fraud Office disclosed yesterday that it has launched an investigation into suspected false accounting involving dealings between BAE Systems, Britain's biggest defence contractor, and two other companies in connection with the £20bn Al Yamamah arms-for-oil deal with Saudi Arabia.

Two men were arrested in connection with the investigation after a series of dawn raids yesterday on eight premises in London and the south of England. They were later released without charge.

The investigation concerns allegations that BAE set up a £60m "slush fund" which was used to provide members of the Saudi royal family and government officials with luxury cars, exotic holidays, gold cutlery canteens and prostitutes.

One of the two men arrested and questioned yesterday was John Sharp, 66, the owner of Robert Lee International. The other was a 73-year-old former RAF wing commander, Tony Winship, who was employed by BAE as an intermediary between it and the two companies.

News of the investigation, which is being conducted jointly by the SFO and the Ministry of Defence Police (MDP), hit BAE shares, sending them 3 per cent lower. The disclosure is doubly embarrassing and damaging to BAE because it is close to agreeing a £3bn deal with the Saudis to upgrade the fleet of Tornado bomber aircraft they bought under the original Al Yamamah deals signed in 1985 and 1992.

The statement released by the SFO late yesterday morning said: "The Serious Fraud Office, with the Ministry of Defence Police, has commenced an investigation into suspected false accounting in relation to contracts for services between Robert Lee International Ltd, Travellers World Ltd and BAE in connection with defence equipment contracts with the government of Saudi Arabia."

The MDP is conducting a separate investigation into alleged corruption concerning the Al Yamamah deal. In September, it arrested an MoD employee working in the Al Yamamah project office in Riyadh in connection with the corruption investigation and subsequently released him on police bail after questioning. One of the two men arrested yesterday was also questioned in relation to this separate MDP investigation.

BAE said last night that none of the eight locations raided by the SFO and MDP belonged to it. The company added: "Subsequent commentary has suggested that BAE Systems is itself currently the target of the investigation. BAE Systems believes this is not correct and there is a possibility that BAE Systems may itself have been the victim of a fraud."

An SFO spokesman responded by saying: "I cannot say that BAE is not the subject of our investigation and I cannot say that BAE is the subject of our investigation. The situation is that we are investigating these contracts and obviously there is a connection with BAE."

BAE officials said they suspected the investigation centred on the possibility that it had been defrauded as a result of inflated or bogus invoices being sent to it in relation to the service contracts with the two outside companies.

However, according to an investigation by BBC Television's The Money Programme, screened last month, BAE had been aware of the possibility that it was being defrauded as long ago as 1996. The programme said that an internal BAE investigator, Martin Bromley, took his concerns to a senior company executive, Steve Mogford, who then ordered him to stop his enquiries. Mr Mogford is now BAE's chief operating officer.

Mr Mogford was also identified in The Money Programme as the BAE executive who signed off the alleged slush fund invoices which simply read "Accommodation Services and Support for Overseas Visitors".

OILING A DEAL

The Al Yamamah arms-for-oil deal, signed by the British and Saudi governments, was the biggest overseas defence deal won by a UK company. And if the allegations are correct, then the incentives used to seal it were spectacular as well.

According to a BBC Television The Money Programme investigation, the principal beneficiary of BAE's largesse was Prince Turki bin Nasser, a leading member of Saudi Arabia's ruling royal family and the man who oversaw the Al Yamamah contract.

His wife received a £170,000 Rolls-Royce as a birthday present which was flown home in a Boeing 747 cargo plane chartered by BAE. His son, meanwhile, enjoyed a £99,000 skiing trip in Colorado and his daughter was given a video of her wedding costing almost £200,000. A three-month holiday for the prince and his family was arranged at a cost of £2m.

Saudi pilots visiting London on Al Yamamah business were provided with prostitutes and had their gambling bills settled, while officials at the Saudi embassy in London were offered £1,000 canteens of gold or silvery cutlery.

BAE states categorically that a slush fund never existed and says that it acts in accordance with the laws of all the countries in which it operates.