Financial Times: Barter fund used to pay commissions to middlemen

By Stephen Fidler and Michael Peel
Published: June 8 2007 03:00 | Last updated: June 8 2007 03:00

An opaque series of contracts dating back to 1985 lies at the heart of the controversy about payments made by BAE Systems in connection with Britain’s biggest ever defence deal.

The contracts covered the purchase and maintenance of Tornado warplanes, Hawk training aircraft and other defence equipment worth £43bn under a deal named Al-Yamamah, Arabic for dove.

Al-Yamamah is covered by government-to-government contracts between Saudi Arabia and Britain, which the British government and BAE insist are confidential.

At its heart was a barter arrangement under which the Saudis delivered oil to BP and Royal Dutch Shell, which sold it and deposited the proceeds in an escrow account at the Bank of England. Payments from this account required signatures from officials of both Saudi and British governments.

From this account, BAE was paid in stages as it completed project milestones. It used some proceeds to pay commissions to middlemen who had helped facilitate the transaction.

The first contract was signed in 1985, when oil prices were depressed. According to a Saudi source, the arrangement was ended by Crown Prince Abdullah bin Abdul Aziz – now the Saudi king – in 2003.

The Guardian and the BBC Panorama programme have alleged BAE paid more than £100m a year to Prince Bandar bin Sultan, former Saudi adviser to Washington and son of defence minister, Prince Sultan.

Earlier disclosures suggested smaller payments, amounting to hundreds of thousands of dollars per month, were made by BAE to cover travel and entertainment expenses by Prince Turki bin Nasser, another former defence official.

BAE will not comment on the specific allegations but denies commission payments made under these contracts were illegal.

In fact, its case is that they were made with the full knowledge of both governments.

One person close to the original deal described the arrangement as a vehicle by which the Saudis paid oil money to royal family members.

“Most defence companies around the world pay commission to agents from time to time. They may look like large numbers to most people but the contracts were very large,” said a spokesman on behalf of BAE.

He said practices had changed since 1985, a suggestion that a deal for Typhoon aircraft that may be signed as soon as next week by the two governments, worth at least £20bn, would be structured differently.

Al-Yamamah was supported by the government’s Export Credits Guarantee Department, which has given a conditional commitment to provide cover for the new deal. A government official said there would be pressure for greater transparency now rather than backing another “weird oil-related deal through the Ministry of Defence that nobody understands”.

Copyright The Financial Times Limited 2007

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