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WORLD: US probes Saudi-linked UK arms firm

by David Robertson and Tom BaldwinThe Times (London)
June 28th, 2007

The British and US governments are on a diplomatic collision course after the US Department of Justice launched a formal investigation into allegations of corruption at defence company BAE Systems.

The US investigation will scrutinise BAE's dealings with Saudi Arabia to expose an account allegedly held by the Bank of England that is used to facilitate Saudi payments for arms.

The British Government refuses to acknowledge such an account exists.

Gordon Brown, who becomes prime minister overnight, could face a diplomatic crisis in the early days of his leadership if the Department of Justice demands information on the account.

Turning down a DoJ request for help in a corruption inquiry could be embarrassing for Mr Brown and damage Britain's reputation.

British defence sources and government officials yesterday said the Ministry of Defence, which allegedly runs the account, was seeking legal advice on how to proceed.

The decision to investigate is potentially devastating for Britain's largest defence company.

BAE gets 43 per cent of its business from the US and, if it is found guilty, the company could face enormous fines or be barred from new US defence contracts.

The company told the stock market it had received notification of the US investigation yesterday morning. Its share price fell 11 per cent in early trading and closed with pound stg. 1.2billion ($2.8 billion) wiped off its capitalisation.

The Times reported last month that the DoJ was assessing whether it had jurisdiction to look into BAE's dealings with Saudi Arabia after a similar investigation by the British Serious Fraud Office was shut down for reasons of national security.

Allegations of corruption have dogged the pound stg. 43 billion al-Yamamah oil-for-arms deal, with BAE accused of running a $US100 million ($120 million) slush fund to entertain Saudi royals and pay bribes.

The DoJ is thought to be looking into payments of more than pound stg. 1 billion made by BAE to Saudi officials, including Prince Bandar bin Sultan, a former ambassador to the US.

The payments are understood to have come from an escrow account held at the Bank of England and merely transferred through BAE's financial system.

BAE and Prince Bandar have denied the payments were bribes and insist the transactions were agreed on by the Saudi and British governments.

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