BAE Systems to face probe after Saudi deal

BAE Systems is to come under further scrutiny over its dealings with Saudi Arabia after the defence group confirmed today it was being investigated by the US Department of Justice.

BAE Systems is to come under further scrutiny over its dealings with Saudi Arabia after the defence group confirmed today it was being investigated by the US Department of Justice.

The group said the US inquiry would examine BAE's "compliance with anti-corruption laws, including the company's business concerning the kingdom of Saudi Arabia".

The size and scope of the investigation is not yet known, but analysts speculated that the justice department investigation will focus on past defence and aerospace contract deals won by BAE where US competitors lost out.

BAE shares dived 9% as news of the probe sunk in, with fears over the implications for its growing American business.

The inquiry comes at a sensitive time for BAE, which is expanding its US operations and is seeking final anti-trust approval for its US$4.1bn (€3bn) of American military company Armor Holdings, having been given the all clear by US Treasury Department last week.

The company has denied allegations that it has been involved in wrongful payments to a Saudi prince in connection with export deals and a 30-month investigation by Britain's Serious Fraud Office was called off by the Government last December.

But the US government was reportedly angered at the decision to halt the British inquiry, which was stopped at the time on the grounds that it threatened UK national security.

The SFO inquiry had focused on allegations of a "slush fund" used by the company to pay Saudi dignitaries to win contracts.

Britain's biggest arms export deal, known as al-Yamamah, which dates back to the 1980s and is worth around £43bn (€31.9bn), was among the deals under investigation.

Analysts said BAE's reputation in the global export market risked being tarnished by the US inquiry, but suggested the stock market concerns over its US business may be premature.

A note from Numis Securities said: "At this stage we don't think the investigation will materially affect future business opportunities or BAE's relationship with the Department of Defense.

"The US government and the DoD sent out a strong signal that it is comfortable with BAE owning strategic defence assets and doing business with BAE following the (Treasury Department) approval last week."

Andrew Gollan at Numis added: "It's unlikely the US inquiry is anything to do with BAE's business in the US, but instead past contracts in which BAE competed against US companies in the global export market to supply Saudi Arabia."

BAE hopes the Armor purchase will boost its US sales by more than US$3bn (€2.22bn).

The group already makes around 40% of its sales in the US, with the current conflicts in Afghanistan and Iraq increasing demand for armed vehicles in particular.

The defence and aerospace group has been keen to tap into this market in recent years, snapping up US armoured vehicle maker United Defence Industries for around US$4bn (£2.96bn) in 2005.

But the group has only operated in the US for around seven years, having been granted approval to buy Lockheed Martin's Control Systems business in 2000.

Liberal Democrat MP Vince Cable today lodged an "urgent question" in Parliament demanding to know how much co-operation the Government will provide the US investigation.

Mr Cable said: "It is extraordinary and embarrassing that we have to rely on the higher standards of probity in the US to investigate alleged corruption by a British company in its overseas business operations."

BAE announced earlier this month that former top law official Lord Woolf had been appointed to chair an ethics committee formed to review the firm's policies and processes.

The five-strong committee will look at the company's adherence to anti-corruption legislation, including any international treaty obligations, with a view to publishing its findings and recommendations early next year.

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