BAE’s long shadows

More than window-dressing but not enough to draw a line under sustained criticism: Lord Woolf’s report on ethical business conduct at BAE Systemscontains 23 specific recommendations to bring about and underpin a serious change of culture at Europe’s largest defence contractor. Yet the Woolf committee’s authority is inevitably diminished by a remit that meant it could not address past corruption allegations, notably in Saudi Arabia.

The report has several practical ideas about how to make ethical behaviour a priority at BAE. It sets new terms for the use of advisers and seeks to end facilitation payments. It gives the board an explicit role in assessing ethical and reputational risk. It demands that BAE commission and publish an independent audit of its conduct within three years. If fully implemented, the report would make BAE a benchmark of best practice in a sector not known for openness.

It is to the company’s credit that it undertook to accept all the recommendations without seeing them in advance. This is a key element in the work Dick Olver, BAE’s chairman, has set in train to retrieve the group’s reputation. Other steps include taking a lead in developing an international code of conduct for the defence industry. Choosing the successor to Mike Turner, the outgoing chief executive, will be another crucial decision. BAE has consistently denied breaking the law, and this new emphasis on upholding ethical standards should mark a welcome break with a murky past.

Yet to many observers it will not seem enough. Lord Woolf’s committee was not able to scrutinise what happened over the Al-Yamamah arms sale to Saudi Arabia in 1989. BAE maintains it paid only lawful commissions rather than bribes to the Saudis. The government’s decision to pressure the Serious Fraud Office into halting its corruption probe on the grounds of national security means this distinction has not been tested. The Justice Department in the US, where BAE’s future lies, has no time for such niceties.

Lord Woolf says the UK government should encourage ethical conduct in the defence industry. This is laudable but lacks credibility, unless the government takes three critical steps.

It should act speedily to reform outdated bribery laws. It should abandon plans to give the attorney-general statutory powers to block prosecutions on national security grounds. And it should set up a public inquiry into the Al-Yamamah allegations and the decision to end the investigation into them. Nothing less will do.