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Financial Times: Al-Yamamah deal: the Saudi foreign policy connection

EXTRACT: The arrangement, at least initially, involved a special account controlled by the Saudis, at the Bank of England. This would receive funds from the sale of Saudi oil lifted and sold by BP and Royal Dutch Shell, which took a commission. Press reports in 1996 suggested this exact arrangement changed – but over nearly two decades, tens of billions of dollars were directed through it.

THE ARTICLE

By Stephen Fidler in London
Published: July 2 2007 03:00 | Last updated: July 2 2007 03:00

Investigators from the US Department of Justice examining BAE Systems’ compliance with anti-corruption laws in its arms dealings with Saudi Arabia will find themselves scrutinising a deal that was used, with the help of the British government, as a secret tool of Saudi foreign policy.

BAE said last week that the DoJ had launched a formal inquiry into the 20-year-old Al-Yamamah arms deal with Saudi Arabia.

The Al-Yamamah agreement, originally signed in 1985 by the Saudi and British governments to pay for the Saudi purchase of Tornado jets, was employed to distribute Saudi oil revenues outside the country’s official budget. “It was a way of Saudis paying money to Saudis,” said one person involved in the deal.

The mechanism has been used to pay for more than combat aircraft. According to one account, it bought arms from Egypt for the Mujahideen fighting Soviet forces in Afghanistan and paid for clandestine purchases of Russian arms to oust Libyan troops from Chad.

BAE serviced this contract and has always denied wrongdoing associated with it, arguing that its work was part of a government-to-government arrangement. If the payments were approved by the British and Saudi governments, how could it be doing anything illegal?

The arrangement, at least initially, involved a special account controlled by the Saudis, at the Bank of England. This would receive funds from the sale of Saudi oil lifted and sold by BP and Royal Dutch Shell, which took a commission. Press reports in 1996 suggested this exact arrangement changed – but over nearly two decades, tens of billions of dollars were directed through it.

The first oil lifting under the contract was on January 31 1986 of 1.8m to 1.9m barrels. The Saudis agreed to deliver 300,000 barrels per day [plus or minus 10 per cent] for the first three years of the contract. The amount of oil delivered varied with fluctuating oil prices up to a reported maximum of 600,000 bpd in 1993, when a new and expanded contract called Al-Yamamah 2 came into force, and fell to 400,000 in 1998 after the last Tornado was delivered. At times, the kingdom replenished the account with cash – and at other times there was a surplus that was available for distribution.

Some or all of the payments from the Bank of England account were routed through the UK’s Defence Export Services Organisation, part of the Ministry of Defence. For this service, the MoD was paid a small commission.

UK media reports have alleged Prince Bandar bin Sultan, the former Saudi ambassador to Washington and now national security adviser to King Abdullah, received more than £1bn from BAE as part of these arrangements.

Prince Bandar has dismissed the allegations as “grotesque in their absurdity”. He has said the payments came from a Saudi government account and were paid into another account belonging to the Saudi ministry of defence and aviation, to which he was a signatory. BAE was not a party to any of the accounts.

A 2006 biography of Prince Bandar, which enjoyed the prince’s co-operation, describes the barter arrangement as one that “circumvented the bureaucracy”. This included the US Congress, whose original objections to the proposed purchase of F-15 fighters led the Saudis to turn to the UK and bring Al-Yamamah into being.

The book, The Prince, by William Simpson, quotes “sources close to Bandar” as saying: “Al-Yamamah picks up the tab; Saudi Arabia will sign with the French or whoever, and Britain pays them on their behalf . . . If Saudi Arabia wants some services from the Americans, or some weapon systems that they have to buy now . . . and they can’t get it from their current defence budget, then they simply tell Al-Yamamah, ‘You divert that money’.”

This and other descriptions paint a picture of British flexibility and discretion that suited the Saudis after their difficulties with the US Congress. BAE became the prime contractor for Saudi defence procurement – and even payments for the maintenance of US aircraft in the kingdom were made through this mechanism.

Prince Bandar said that the account to which Al-Yamamah funds had been allegedly directed at Riggs Bank in Washington had been audited by the Saudi ministry of finance. He pointed out that previous US investigations into the Riggs account had found no wrongdoing.

However, at least one investigator who has examined those accounts has said it was hard to distinguish between public and private use of Saudi funds.

Copyright The Financial Times Limited 2007

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