The Sunday Telegraph
November 15, 2009
Ministry cannot account for where £1bn went in Saudi oil-for-jets affair
DETAILS OF a damning secret report into Britain’s biggest ever arms deal, which raises questions over how the Ministry of Defence spent more than £lbillion, can be disclosed for the first time by The Sunday Telegraph.
A National Audit Office (NAO) investigation into the controversial £20 billion al-Yamamah arms deal between Britain and Saudi Arabia found that:
- The MoD could not properly account for nearly £1billion of cash it paid to British Aerospace (now Bae Systems) at the time of the deal;
- Bae also “failed to account” for the £1billion;
- A£30.3 million management fee was paid to Bae even though there was no “legal or contractual obligation” to do so – a payment described by auditors as “irregular”.
Documents also outline how auditors demanded that the Govemment investigate Bae accounts to find out what had happened to the money, and reveal the fears that led to the report being kept secret for 17 years.
The deal, agreed in 1985, saw British Aerospace-built warplanes exported to Saudi Arabia in exchange for oil, which was sold on the open market by the British Government. The deal has long been at the centre of corruption allegations.
The disclosures are certain to raise new questions as to whether millions of pounds were paid in secret commissions to middlemen.
The revelations could not come at a worse time for Bae Systems, which is facing a Serious Fraud Office investigation over other arms deals.
The al-Yamamah deal involved a series of complex transactions. Saudi oil was given to the Government, which then sold it on the open market. The money raised was then used to buy Tornado fighter and ground attack air-craft and Hawk trainer jets
from Bae, which were then exported to Saudi Arabia.
While the NAO report is still secret, correspondence between the MoD and the NAO has been seen by The Sunday Telegraph.
An internal NAO memo, written by auditor J Parsons on July 12, 1991,reveals that “payments of £30.3 million (redacted) have been netted off in a suspense account. This is contrary to the fundamental principle of gross accounting and as such is irregular.”
It added that “the department have not accounted in their suspense payments for nearly $ 1.5billion [£1billion] of receipts and payments.
“By any definition, failure to account for $1.5billion indicates a certain weakness in control.” In a draft letter, Sir John Bourn, the former auditor general, urges Michael Quinlan, the then permanent secretary at the MOD, to push Bae to account for the money it had been paid.
He demands that the ministry’s auditors go to the company and insist on seeing its accounts.
The letter to Mr Quinlan goes on: “A thorough investigation into the profitability of the sale would reveal whether substantial commissions have been paid. There are, of course, guidelines to cover such circumstances. We would need to see evidence that these have been followed.”
At the time, the NAO had no power to examine the accounts of a private company.
The documents reveal why the report was kept secret.
Under normal circumstances, the ministry’s accounts would have had to be published and qualified by Sir John, leading to a hearing by MPs on the Commons public accounts committee, then chaired by Sir Robert (now Lord) Sheldon.
Such a scenario provoked panic in Whitehall, since the Government had agreed with the Saudis to keep all the details of the deal secret and it could have led to the cancellation of the order for the jets.
By any definition, failure to account for $1.5billion indicates a certain weakness
One letter from an auditor warns that it could “blow up”. Another says that the whole business was “a murky area”.
Whitehall invoked national security reasons to prevent public reporting of the accounts. Instead, a secret hearing attended by Lord Sheldon, his deputy Michael Shaw, Mr Quinlan and Sir John was held. In that way, the obligation to inform Parliament had been fulfilled, even though the report itself had not been made public.
The hearing must have raised concerns because it led to Sir John’s demand for an audit of Bae’s al-Yamamah accounts, though it is not clear whether this ever happened.
Information on the deal is to be published under Freedom of Information rules this week.
However, many documents are still being kept secret and the NAO has told the Information Commissioner that an entire file on the contract, dating between 1995 and 2002, has been destroyed.
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