Just how bad is UK corruption?

The UK government recently ordered that the Serious Fraud Office call off its investigation into the Al-Yamanah arms deal with Saudi Arabia. But that's not the end of the story, says Simon Wilson

What is the Al-Yamanah deal worth?

It is the UK's biggest-ever foreign defence order, worth a total of £43bn in revenue to British Aerospace (now BAE) from 1988 to 2005 and potentially several times that over the longer term. The deal was originally agreed in 1985 thanks in part to then-PM Margaret Thatcher, who cultivated a close relationship with the Saudi royal family. Originally, the deal involved the sale of 72 Tornado fighters and 50 Hawk jets, as well as the construction of two airbases and a host of other equipment and maintenance contracts. In 1993, the deal was expanded when the Saudis agreed to buy a further 48 Tornados and 20 Hawks. Then, last year, a third stage was signed (involving another 72 warplanes, this time Typhoons) worth at least £10bn to BAE.

Was the Al-Yamanah deal always controversial?

Yes. Allegations of large-scale bribery soon surfaced, with claims that up to 30% of the contract value was being paid out in commissions to middlemen mostly Saudi royals. The National Audit Office started an investigation in 1989, but its report was supressed by the Parliamentary committee responsible for the NAO. The report has still never been published officially on grounds of international relations and commercial interests. But there is no doubt that Britain was bribing Saudi officials. As ex-defence secretary Lord Gilmour told BBC2's Newsnight: "You either got the business and bribed, or you didn't bribe and didn't get the business. It just happens to be the terms of trade. The fact that it's illegal in Saudi Arabia doesn't mean much."

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What were the allegations this time round?

The Serious Fraud Office opened an investigation into BAE in 2004, after the bribing of foreign officials became a crime the previous year. But as early as 2001, the SFO received information from Eddie Cunningham, who claimed to have been involved, that BAE had set up a £60m slush fund to finance the lifestyle of Saudi princes and businessmen. The SFO took the inquiry seriously, making at least five arrests. Crucially, though, investigators went far beyond looking at mere perks' to focus on how BAE had allegedly misdescribed the payments ie, on false accounting and fraud.

Why was this crucial?

Because the trail led first to a network of companies in the British Virgin Islands, allegedly used by BAE to pay millions of pounds in commissions'. And second, it led to a network of bank accounts in Switzerland through which commissions were channelled. This summer, the SFO persuaded a Swiss magistrate to force the banks to make partial disclosure of account details. The banks notified the Saudi royals that the UK was investigating them. The royals then went into self-preservation mode. The Saudi ambassador to London threatened to suspend the current phase of Al-Yamanah until the SFO investigation was called off and, worse, it is said, to suspend co-operation over security against the Islamist terror threat. Under pressure from Downing Street, Lord Goldsmith, who oversees the SFO, called in its director and ordered him to pull the investigation.

So is it all over?

No. BAE still faces an ongoing investigation by the SFO and Ministry of Defence police into corruption allegations concerning arms sales in Tanzania and South Africa among others. And the Saudi issue isn't going away. The decision faces a legal challenge from anti-arms-trade and anti-corruption groups. It is also the subject of a growing outcry from the OECD, the guardian of an anti-bribery code which was enshrined into UK law in 2001 after widespread criticism of our lax attitude. Under international law, countries are not allowed to take into account relations with another country when deciding whether or not to prosecute corruption. Britain will be obliged to explain its actions to an outraged OECD next month.

How good is the UK's record at tackling corruption?

Not that good. In the US fraud is tackled openly, and tends to result in convictions, but this is not always the case here: the OECD recently placed the UK with Japan and Italy as nations where corruption is a serious problem and Britain has often been criticised by the US for the same reason. Tony Blair announced a new national anti-corruption police unit in April and a new anti-corruption Bill has been gestating for three years. Still, since 2001, when the UK implemented the OECD code, not one person has been prosecuted for bribing a foreign official.

Was the government right to call in the Serious Fraud Office

YES

1 It's commercial realpolitik: one man's commission payment is another man's bribe. Get over it.

2 National security, and the (presumed) specific threat to British interests in Saudi Arabia that halted the deal, must take priority.

3 France was actively seeking to poach the business, with its Rafale fighter jets built by Dassault.

NO

1 The Saudis were bluffing: they have just as much to lose diplomatically, if not commercially.

2 By putting commercial interests above the law, we set a dangerous precedent which weakens us diplomatically and our authority to act against corruption elsewhere in the world.

3 This will backfire on Britain commercially as it undermines the UK's flagging reputation as a clean place to do business.