Arms manufacturer told to 'get ethical' on deals corruption

Defence giant BAE Systems was told today that some future contracts may have to be sacrificed if it wants to repair the company’s tarnished reputation.

BAE, which has faced long-running controversy relating to allegations about its conduct on a Saudi arms deal, will also need to adopt stronger anti-bribery measures and a global ethical code of conduct.

The proposals were among 23 recommendations made by an independent committee headed by Lord Woolf, the former Lord Chief Justice, following a year-long review into current policies and practices at BAE.

Lord Woolf said BAE risked suffering “long-term damage” if it pursued every defence contract regardless of ethical considerations.

He said: “BAE either becomes an ethical company, which involves refusing to get involved in some contracts, or it does not become a fully ethical company reaching the gold standard that we have identified.

“There are contracts that are not worth having and that will do long-term damage to the company, and the company has to accept that.”

The committee said regular, independent external audits of business conduct were also needed to help restore confidence in the firm. It can strengthen anti-bribery measures by the way it appoints, manages and pays advisers.

While the Woolf Report did not investigate previous allegations, the report contained an admission from BAE’s chief executive and chairman that the company paid insufficient attention to ethical standards in the past.

Lord Woolf said BAE had already made considerable progress in improving standards, but added that it now had a route map to ensure it became a “leader among global companies” for standards in business conduct.

He said: “Given the position that it is in, the company has told us it accepts that it has no alternative but to continue along the route of taking all practicable steps to ensure that the circumstances that gave rise to allegations of past misconduct do not re-occur in the future.”

The company will outline how it plans to respond to the Woolf report by the end of July. It has previously pledged to implement the findings.

The High Court recently ruled that it was unlawful for the Serious Fraud Office (SFO) to end an investigation into the Saudi allegations, which related to contracts that formed part of the Al Yamamah programme between the UK and Saudi Governments dating back to 1985. The SFO has been given permission to appeal over the ruling.

Meanwhile, the company is also the subject of a separate ongoing investigation by the SFO into suspected false accounting. BAE denies any wrongdoing.

And in June 2007, the company was notified by the US Department of Justice that it had commenced a formal investigation relating to the group’s compliance with anti-corruption laws, including business concerning Saudi Arabia.

Today’s report, which cost £1.7 million, said the firm admitted it previously failed to “pay sufficient attention” to ethical standards and avoid activities that had the potential to damage its reputation.

It said: “Critically, both the chairman and chief executive, in discussions with us, acknowledged 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.

“Combined with this was its acceptance of conditions which constrained its ability to explain the full circumstances of its activities. Together, these contributed to the widely-held perceptions that it was involved in inappropriate behaviour.

“They recognise that, justly or otherwise, these perceptions have damaged the company’s reputation and that it must continue along the route of taking all practicable steps to ensure that such circumstances do not re-occur in relation to future contracts.”

Lord Woolf also called on the Government to be more “pro-active”.

He said: “Government is the biggest customer of our defence contractors in this country. The Government can influence standards...and should be more pro-active in giving leadership in the standards they require.”

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