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BAE and the Saudis: How secret cash payments oiled £43bn arms deal
BAE admits wrongdoing after US justice department lays out how British firm used intermediaries to hide money
David Leigh and Rob Evans
Friday 5 February 2010 19.26 GMT
The Saudi contract called al-Yamamah – which means "the dove" – was Britain's largest-ever arms agreement, and the source of intense scrutiny and controversy ever since it was signed in the mid-1980s.
Today – after years of denying claims of corruption and bribes – the company finally admitted that the deal was mired in wrongdoing.
The US department of justice today filed a telling indictment to which BAE has agreed to plead guilty.
It says, among other accusations, that BAE "used intermediaries and shell entities to conceal payments to certain advisers who were assisting in the … [Saudi] fighter deals".
The statement goes on to give examples: "BAE agreed to transfer sums totalling more than £10m and more than $9m to a bank account in Switzerland controlled by an intermediary. BAE was aware that there was a high probability that the intermediary would transfer part of these payments to the [Saudi] official."
To Britain's shame, these admissions have been forced out of BAE, not by the UK's own prosecutors, but those of another country.
The stakes around al-Yamamah were always high. The deal was immensely lucrative for BAE at the time, generating £43bn of revenue and keeping the firm afloat for more than two decades.
It was important enough for the then prime minister, Margaret Thatcher, to be involved in helping to clinch the long-running deal in 1985. And, standing behind the politicians at the signing ceremony, was the smiling Prince Bandar, son of the Saudi defence minister [now crown prince] Sultan.
It was later to become plain how much he had to be pleased about.
The agreement was substantial and involved expensive military hardware.
In the first phase, Britain sold the Saudis 72 Tornado planes, 30 Hawk trainers and 30 other trainer planes. A further batch of 48 Tornados was sold in the second phase of the deal agreed in 1993, and a third tranche, agreed after the end of the Serious Fraud Office investigation, involved the sale of 72 Eurofighter Typhoons.
The Guardian first started its lengthy investigations into BAE back in 2003. The paper obtained evidence that the company was operating a slush fund through front companies to provide substantial treats and favours to Saudi dignitaries.
Whistleblowers came forward to reveal how the arms dealers were spending huge sums to keep the head of the Saudi air force sweet.
But those sums proved relatively small in the grand scale of things. The Guardian discovered that BAE was paying secret sums of money to confidential agents all around the world through a global system of offshore anonymous companies. An undeclared subsidiary called Red Diamond was acting as a vast laundry. A parallel entity called Poseidon made specific Saudi payments.
Or, as the justice department in Washington put it today: "BAE took steps to conceal its relationships with … advisers and its undisclosed payments to them. For example, BAE contracted with and paid certain of its advisers through various offshore shell entities beneficially owned by BAE. BAE also encouraged certain of its advisers to establish their own offshore shell entities to receive payments while disguising the origins and recipients of such payments."
The justice department states the arms firm operated a deceptive system of parallel overt and covert payments to its agents, who could then use the secret supplies of cash to pay bribes.
"BAE retained and paid the same marketing adviser both using the offshore structure and without using the offshore structure."
In the UK, the SFO launched its own inquiry in 2004. Its investigators started to get close to the Saudi royal family, uncovering evidence of huge sums being paid to Swiss bank accounts linked to middlemen including the well-connected billionaire Wafic Said.
In September 2006, the Swiss were preparing to disclose the bank records to the SFO. The firm and its lobbyists started a public campaign warning that huge numbers of arms-manufacturing jobs could be lost.
Behind the scenes, the Saudis were issuing their own threats. They claimed they would stop supplying vital intelligence about al-Qaida terrorists to Britain if the investigation was allowed to continue. SFO investigators were told dramatically that they faced "another 7/7" and the loss of "British lives on British streets" if they carried on.
It was reported that the Saudis had issued an ultimatum that the inquiry had to be terminated within two weeks, and in December 2006, Lord Goldsmith, then the attorney general, rose in the House of Lords to announce that the investigation had indeed been brought to a halt.
It transpired that Tony Blair had written a "secret and personal" letter to Goldsmith demanding that he stop the investigation.
He hoped for a new arms deal from the Saudis. Plus, he claimed, there was a "real and immediate risk of a collapse in UK/Saudi security, intelligence and diplomatic co-operation".
The prime minister said he "would be failing in his duty" if he had not made his views known.
Inside the SFO, threats were privately discounted, on the grounds they were coming from Prince Bandar himself, a recipient of BAE's largesse.
But that was not the end of the matter. In 2007, the Guardian revealed that the claims the SFO had been investigating included one that BAE had secretly paid more than £1bn to Prince Bandar through a US bank, as well as making him the free gift of an airliner.
The US justice department decided to launch its own investigation. At its heart were claims that BAE had been paying £30m every quarter for at least a decade to the colourful prince.
The US prosecutors could take jurisdiction as the payments had been channelled through a US bank in Washington where Bandar was the Saudi ambassador for 20 years.
The British government refused to hand over documents about the Bandar payments to help the American prosecutors, payments allegedly made with the knowledge and authorisation of Ministry of Defence officials. Ministers had claimed for 20 years that there were no secret commission payments, and BAE officially promised the US government the same in a 2000 official letter which later proved to be its undoing.