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In BAE Probe, U.S. Steps In Where Brits Fear to Tread (the corruption scandal in which Shell played a key role)

Last May 12, when U.S. Department of Justice officers at the Houston airport slapped a subpoena into the hands of Michael Turner, then CEO of London-based BAE Systems Plc, it was a smack heard round the world. They also grabbed and examined his computer and documents he was carrying. BAE, with major subsidiaries in the United States, Australia and India, is Europe’s largest military defense contractor. And U.S. prosecutors had stepped in where the Brits feared to tread.

The subpoena sought evidence about payments the company had made to secure an $85 billion arms deal with Saudi Arabia. Company officials had contended that they paid perfectly legal commissions to an agent, and that the payments were approved by the Kingdom of Saudi Arabia. But the United Kingdom’s Serious Fraud Office thought they sounded an awful lot like bribes. (The SFO is England’s equivalent of the Department of Justice’s criminal fraud section.)

When the SFO pressed its probe over BAE’s objections, the Saudis threatened to kill the arms deal — the largest in U.K. history. Worse, the Saudis warned they would quit sharing intelligence on terrorists, putting at risk “British lives on British streets,” according to court records. So the SFO dropped the probe — not for lack of evidence, it stressed, but for fear of Saudi reprisals.

The impact of that decision has been far-reaching. First came a lawsuit in Great Britain that laid bare much of the political maneuvering that killed the probe. Then came a major shake-up of management at BAE, including the promotion of Ian King to CEO and the hiring of Philip Bramwell as its new general counsel. In his first interview with a U.S. journalist since the scandal broke, Bramwell talks of leading the company’s reform efforts. And he concedes that his lawyers must deal with several ongoing bribery investigations — so far no charges have been filed — as part of its daily workload. “But our core focus is still supporting the growth of our business,” he adds.

So why have the Americans jumped into the British/Saudi fray? The Justice Department won’t comment — indeed, a wall of silence has come down across the department and anyone involved with the BAE case. And Bramwell says he can’t talk about the probe. But sources and British court records suggest several reasons.

For one thing, the U.S. actions serve to defend an international anti-bribery treaty that 37 nations, including the U.K., have signed. The treaty requires countries to investigate and prosecute corporate bribery. Its avowed purpose is to protect developing countries from being exploited by corporate corruption, and to allow all global companies to compete fairly on the fabled level playing field.

Another reason the United States intruded may be to justify its own aggressive record of bribery prosecutions. The U.S. has charged more companies for bribery than has any other nation. It’s hard to defend that statistic if other nations refuse to even investigate alleged bribes.

The U.S. stance, though, raises a fistful of legal issues. For one, does the Justice Department have jurisdiction to delve that deeply into the actions of foreign companies? What distinguishes a bribe from a legal commission? And how do general counsel in America convince their overseas sales and marketing folks not to follow in BAE’s footsteps? Susan Hackett, general counsel of the Association of Corporate Counsel in Washington, D.C., sums up the BAE fallout: “General counsel are left to grapple with the inconsistencies of international law.”

And that’s a real concern for in-house counsel at multinational companies. Attorney Richard Grime says he’s been hearing the grumbling and frustration from GCs. Chief legal officers “want to comply with the law, but they see their competitors making payments and seemingly skirting their own laws prohibiting bribes and not facing any consequences,” notes Grime, a partner at O’Melveny & Myers in Washington.

Grime, born and schooled in Great Britain but now a U.S. citizen, found the U.K.’s handling of BAE “disappointing, but not surprising.” As a former attorney and assistant director at the Securities and Exchange Commission who left the commission in 2007 after nine years, he’s seen the SEC and Justice Department aggressively prosecute U.S. companies for making payments to foreign officials. The most notable resulted in Baker Hughes Incorporated signing a deferred prosecution agreement in mid-2007 and paying $44 million in fines and disgorgement [July 2007]. In fact, the Justice Department pursued more bribery prosecutions in the first half of 2008 — seven — than in any entire year prior to 2007.

Grime says he’s always wondered if there would be a backlash by corporate America. No general counsel is going to say, “We’re not going to comply with the law,” Grime says. “But I think it’s only a matter of time until someone says, ‘We’re frustrated that there doesn’t seem to be equal treatment of our competitors. You’ve got to put pressure on them [other countries] to prosecute.'”

As for Britain, its reputation for battling corruption wasn’t all that great to begin with. While U.S. prosecutors are pursuing bribery cases at a record pace, the U.K. has yet to prosecute a single company for bribery. Dropping the BAE case only fueled the critics’ fire. As Nick Clegg, leader of the opposition British Liberal Democrats, put it: By killing its BAE probe, the U.K.created “a legal license for international blackmail.”

The BAE case is four years long, with a complicated history. But it springs from some fairly simple acts: In order to secure a lucrative arms contract, BAE allegedly paid off several Saudi officials, including Prince Bandar bin Sultan bin Abdul Aziz Al Saud. The payments allegedly totaled some $2 billion over nearly two decades.

Bandar helped negotiate the $85 billion Al Yamamah (“The Dove” in Arabic) arms deal in 1985 directly with the British government, with BAE’s precursor as the prime contractor. The deal has been expanded several times since. Bandar is a son of the deputy prime minister/minister of defense in Saudi Arabia. The flamboyant prince also served as Saudi ambassador to the U.S. from 1983 to 2005, becoming so close to both President Bushes that they referred to him as “Bandar Bush.” He’s a British-trained pilot who has flown various fighter aircraft. He’s also been implicated in various books and newspaper articles as funding Central Intelligence Agency-sponsored activities in the Middle East. Bandar now serves as his country’s national security chief.

Most of what is known about the BAE case comes from documents and witness testimony that emerged earlier this year when two British activist groups sued to reopen the investigation. The SFO’s investigation began quietly around July 2004. It was triggered by a whistleblower’s claims, carried in London’s Guardian newspaper, that BAE had a $120 million slush fund to facilitate defense contracts.

The fund allegedly provided certain Saudis with chartered aircraft, luxury limos, exotic vacations and prostitutes, and covered some of the Saudis’ gambling debts. BAE denied the claims. After a year of investigating, in October 2005, the SFO ordered BAE to disclose specific details of payments to agents and consultants involved in the Al Yamamah contracts.

That’s when BAE’s then-legal director, Michael Lester, phoned then-SFO director Robert Wardle in an effort to halt the investigation. Wardle, now with DLA Piper in London, didn’t budge. According to Wardle’s notes of the conversation, later made public, Lester then threatened to “make further representations to the Ministry [of Defense]” as to why the probe should be halted.

Following through, BAE’s lawyers contacted the defense minister and sent a “strictly private and confidential” memo to the then U.K. attorney general, Lord Goldsmith, asking him to put an end to the probe. (Goldsmith is now head of European litigation for Debevoise & Plimpton in London.) Although the SFO is an independent entity, it reports to the attorney general, who reports to Parliament. One of the attorney general’s top duties, as chief legal adviser to the U.K. government, is to act in the public interest. BAE’s memo argued that the investigation was “seriously contrary to the public interest … [and] would adversely and seriously affect relations between the U.K. and Saudi Arabian governments and would almost inevitably prevent the U.K. securing its largest export contract in the last decade.”

The attorney general ignored BAE’s plea, and allowed the SFO director to continue the probe. Investigators eventually tracked some BAE payments to a Swiss bank account allegedly belonging to Wafic Said, Prince Bandar’s business manager. When the Saudis heard that Switzerland had agreed in July 2006 to let SFO investigators see the accounts, Prince Bandar demanded a meeting with U.K. officials. Later witness statements corroborated an account in London’s Sunday Times that said Bandar told U.K. officials to halt the SFO probe, or else a Saudi deal to buy 72 Eurofighter Typhoon aircraft would be killed, and “intelligence and diplomatic relations would be pulled.”

Three times in November and December 2006, according to court documents, the U.K. ambassador to Saudi Arabia met with SFO director Wardle, to stress the gravity of the Saudi threats. Apparently moved by the ambassador’s pleas, Wardle testified that he considered offering BAE a plea bargain, in which BAE would plead guilty to corruption on “a limited basis to avoid any need to name members of the Saudi royal family in open court.”

The attorney general agreed to the plea bargain on Dec. 5, and briefed the prime minister. But on that same day Bandar met again with British officials in London. The content of those meetings has not been disclosed.

The next day Prime Minister Tony Blair asked AG Goldsmith to hold off on any plea deal. So Wardle canceled his proposed visit to BAE. Two days later, on Dec. 8, Blair wrote a personal note to Goldsmith, asking the AG to consider again the public interest issues raised by the ongoing investigation. The court quoted Blair’s note, which claimed “the real and immediate risk of a collapse in U.K./Saudi security, intelligence, and diplomatic cooperation.” It also cited “the critical difficulty … over the Typhoon contract.”

Six days later, on Dec. 14, 2006, the SFO director and the AG announced that the investigation was dropped. A government press release noted “the need to safeguard national and international security,” then added: “No weight has been given to commercial interests or to the national economic interest.”

Two British activist groups, The Corner House and the Campaign Against Arms Trade, immediately wrote letters to the government challenging the decision. In early 2007 they sought and eventually won a judicial review of the government’s actions.

The British High Court (a midlevel court) ruled in April 2007 in favor of the activists. The SFO immediately appealed to the U.K.’s highest court, the House of Lords. (In 2009 a U.K. constitutional amendment will create a separate supreme court; until then, the upper house of Parliament also serves as the country’s highest judicial body.)

In the meantime, during the summer of 2007, the British news media reported that Bandar allegedly had deposited some of the $2 billion in payments into accounts at Riggs Bank in Washington, D.C., while Bandar was serving as Saudi ambassador to the U.S. It is believed that those accounts drew the U.S. into the investigation. Under the U.S. Foreign Corrupt Practices Act, America can prosecute a foreign person or company for bribery if it causes “an act in furtherance of the corrupt payment to take place within the territory of the United States.”

Records show that in July 2007, the U.S. Justice Department made an official request to the U.K. government for “mutual legal assistance,” asking for information that the SFO had gathered during its BAE investigation. More than a year later, the British still haven’t responded to the request.

The U.S. intrusion into the case didn’t faze the House of Lords. On July 30, 2008, the body announced its decision to overturn the High Court, leaving the U.K.’s investigation closed. The lords based their decision, which is final, primarily on the legal right of the SFO director to close a case based on his own discretion, without interference from the government.

BAE was rewarded for the government’s stonewalling. Immediately after the probe was dropped, Saudi Arabia went through with its $8 billion purchase of 72 Typhoon jet fighters. Then, ten days after the House of Lords decision this year, the Saudis announced that they would contract with BAE for an additional 48 to 70 Typhoons.

Saudi Arabia isn’t BAE’s only regular customer, of course. Despite the ongoing U.S. investigation, the U.S. military continues to be a prime client. It awards contracts worth tens and hundreds of millions of dollars each month to BAE. In August alone, the Air Force named BAE a prime contractor in a $6.9 billion contract for weapons systems; the Navy awarded it a $14 million contract for alterations and repairs to the USS Oscar Austin; the Marine Corps ordered $43.5 million worth of mine-resistant armored vehicles; and the U.S. Department of Defense contracted for $85.6 million worth of lightweight howitzers.

If BAE were tried and convicted for bribery, the company would be barred from contracting with the U.S. government. Because of the close connections between the U.S. military and BAE, most observers believe that the Justice Department will allow the company to enter a settlement or a nonprosecution agreement. Boeing entered such an agreement in July 2006, paid $615 million in civil and criminal penalties, and was still able to take part in government contracts. At press time sources said talks between BAE and Justice were continuing.

One person deeply involved in those talks is BAE’s general counsel. Bramwell was named to replace Lester, who retired in late 2006, during the U.K. probe. When the SFO dropped the investigation in December, Bramwell was able to start his new job in January 2007 with a cleanup mission.

One of his first steps was to introduce a three-year plan to reshape the legal department. Bramwell says he chose to model his plan along the lines of U.S. companies. That includes “making sure each line of business has its own chief counsel, who reports to the general counsel.”

Another major step for Bramwell was beefing up compliance. It was a smart — and natural — move for him. Prior to joining BAE, he served as GC at the U.K.-based telecommunications company, and so was steeped in regulatory compliance. He says even he didn’t realize how complex the international defense industry is, with its “extra layer of national procurement and national security regulations” for each country. Until Bramwell arrived at BAE, the defense giant had no chief compliance officer. He quickly named Mark Serfozo, an in-house counsel with a BAE subsidiary, to the post.

In another key move, he chose Andrew Guest, former chief counsel at a subsidiary, to become chief counsel for the Saudi Arabia region. That’s where BAE has major contracts, and more recently major headaches with bribery investigations. In September he appointed Mike Elston, then chief counsel at another BAE subsidiary, to be chief counsel for India — another booming business region for BAE. This past July, he picked Clyde & Co. lawyer Jo Talbot to head dispute resolution and risk management. So far he’s made 14 new appointments to his 120-lawyer staff within his first 20 months.

Bramwell says his goal is to create a world-class legal department with specialists, rather than generalists. “Who gets out of bed looking to be average?” Bramwell told Corporate Counsel‘s U.K.-based sibling publication, Legal Week.

While BAE’s leaders haven’t acknowledged any legal wrongdoing, they admit some mistakes. In a statement, the BAE chairman and chief executive recognized “that the company did not in the past pay sufficient attention to ethical standards and avoid activities that had the potential to give rise to reputational damage.”

So in June 2007, BAE and Bramwell commissioned a committee, headed by Lord Woolf, the former chief justice of England and Wales from 2000 to 2005. BAE charged the Woolf committee with studying the company and recommending ethical reforms. The committee interviewed several top members of the in-house legal team, including Bramwell, Serfozo, Guest and Sheila Cheston, general counsel of BAE Systems Inc., the U.S. subsidiary. Two outside counsel were also questioned, John Turnbull, a partner at Linklaters, in London, and Roger Witten, a partner at Wilmer Cutler Pickering Hale and Dorr in New York.

The Woolf report, published May 6, did not look into the Saudi arms deal because BAE had made past contracts off-limits to the Woolf committee. Its job was to point “the way forward.” Still, the report mentions the case as a “backdrop” and then listed nine countries other than Saudi Arabia “about which allegations have been made in the media” concerning BAE’s recent business conduct. Whether real or not, the report said the “perceptions” of wrongdoing “have damaged the company’s reputation … and [it must] ensure that such circumstances do not reoccur in relation to future contracts.”

The report listed 23 recommendations for change, and the BAE board immediately vowed to implement all of them over the next three years. Many of the recommendations appear similar to changes that the Justice Department has required in settlement agreements. Two key ones involve increased transparency and a “rigorous process” for choosing and managing agents on all future contracts.

The company ended or reviewed all existing agent contracts, the report said, and is putting all new agents through a rigorous process. The process involves review by a panel of external and internal lawyers against a comprehensive set of “red flags” or “warning signs.”

Bramwell calls the Woolf document “an extraordinarily useful report,” and says his legal team is deeply involved in implementing it. To do that, BAE created a steering committee — which Bramwell chairs. Under that are several working groups. And at least three in-house lawyers serve on those groups. Bramwell also chairs a working group, one that is looking at “implications of the recommendations for operations of the board and board committees.”

Besides the legal department, the company has also shaken up its entire management. A new CEO, Ian King, took over in August; he had previously been CFO. And BAE named new COOs for both the U.S. and the U.K./rest of the world operations within the last 18 months, as well as a new group marketing director.

Bramwell is not done with his overhaul. He is also looking at relationships with outside counsel. Besides Linklaters and Wilmer, BAE has primarily used Allen & Overy, Freshfields Bruckhaus Deringer, Slaughter and May, and Wragge & Co. Any changes in outside law firms probably won’t come for a year or so, Bramwell says. Right now, he’s focusing on efficiency: “We want to ensure that we are providing the highest quality of instructions. And that they are staffing those cases as leanly and efficiently as they can.”

The past, however, continues to haunt BAE. In October its president of operations in India was detained and questioned in the U.K. about a suspected bribery plot with a Viennese count to win arms contracts in Austria and the Czech Republic. The exec is Julian Scopes, BAE’s former head of government affairs before recently moving to India, and he has declined to comment. Also in October, Swedish news reports said the Serious Fraud Office was investigating at least a dozen current or former BAE officials for alleged bribery schemes on arms deals.

It remains to be seen if Bramwell’s and BAE’s changes will be enough to lift the company’s fallen reputation. Or if the SFO’s new investigations into other BAE deals will convince the U.S. Justice Department to let the company off the hook on the Saudi one. But the BAE case’s impact may ultimately lie with the effect the scandal has on other companies. In London, the international law firm of Norton Rose Group has launched an anti-corruption and business ethics group in response to increased client demand for help in reducing exposure to anti-fraud laws, especially U.S. laws.

“The climate is changing here and will change quite fast, as it did in the U.S. three to five years ago,” says Sam Eastwood, the partner heading the new group. “Three years ago, a law firm didn’t dare approach a corporation and say, let’s talk about corruption. It would be an embarrassment,” Eastwood says. But now the corporations are calling the lawyers to talk about it.

Interestingly, Eastwood invited Bramwell to speak to a group of corporate general counsel in November. It was, Eastwood says, a “sold-out crowd.” 

Cases brought by top exporting countries. 

2008*: 103 
2007: 67 

2008*: 43 
2007: 4 

2008*: 23 
2007: 18 

2008*: 19 
2007: 9 

2008*: 17 
2007: 1 

2008*: 0 
2007: 0 

*As of June 30, 2008 

Source: Transparency International


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