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SM0378 Ethics and Governance Summative Assessment: a case study about BAES and the SFO
From date-consecutive articles from The Times, written by Tom Baldwin, Christine Buckley, Sam Coates, Miles Costello, Steve Hawkes, Angela Jameson, Dearbail Jordan, Erick Kabandera, David Leppard, Robert Lindsay, Miranda McLachlan, Dominic O’Connell, David Robertson, Alex Spence, Martin Waller, Karl West and Michael Woodhead; and an ‘opinion piece’ by Richard Dowden (Royal African Society)
Introductory Summary (You may disregard the italicised material (pages 1-3). It adds little to the case. However, you may benefit from the quick survey it provides. In your responses, use only pages 3-17.)
BAES plc is the United Kingdom’s largest arms manufacturer, with 100000 employees. Among its products, some of which are identified in this case study, are military ‘fighter’ jet aircraft such as the ‘Tornado’ and ‘Typhoon’ –named like stormy winds because of their destructive force when deployed in air-to-air and air-to-ground attacks. ‘Hawk’ and ‘Gripen’ (a fighter made by Saab, a company 20% of which BAES owns) are the names of other fighter jets, presumably because they are like birds of prey. The acquisition of Armor Holdings by BAES in 2007 means that it also produces Humvees.
BAES sells equipment and services to UK Armed Forces but also exports them to other governments worldwide. This case study concerns the way BAES won contracts with foreign governments, notably those of the Czech Republic, Qatar, Romania, Saudi Arabia, South Africa, Tanzania and the USA.
The following display identifies senior directors of BAES (known before 1999 as British Aerospace):
You will respond to the tasks in the assessment after exploring the complex arrangements that BAES made to secure contracts with foreign governments, through subsidiaries like Novelmight, Poseidon Trading Investments, Red Diamond Trading and other partners like Envers, Merlin International and Kayswell Services. You will notice that many of these entities were registered ‘offshore’ in the British Virgin Islands (BVI). For every one person in the BVI population, around forty foreign companies are registered in this Caribbean paradise. You will examine the role of authorities such as the UK’s Serious Fraud Office (SFO) and National Audit Office (NAO), and the USA’s Department of Justice, in the investigation of alleged offences by BAES. You will consider judgments made by a number of British and American judges about the sort of offences that BAES admitted and those it denied.
You will also consider work done by an eminent former Lord Chief Justice of England and Wales to evaluate the conduct of business by BAES. You will encounter the views of UK and other politicians and non-government organizations concerning the validity or invalidity of the methods adopted by BAES; and concerning the validity or invalidity of decisions by the authorities to scrutinise (or not) the conduct of BAES and of foreign governments, politicians and officials in their dealings with BAES.
A lot of individuals are named in the case. They may or may not be blameworthy or praiseworthy.
They include: Wafiq Said, Mark Thatcher, Sir Colin Chandler, Norman Lamb, MP, Nick Cunningham, Sir Menzies Campbell, MP, Wilbroad Slaa, Timothy Langdale, QC; Gavin Cunningham, Nick Hildyard, John Bredenkamp, Sailesh Vithlani, Victor Temple, QC, David Perry, QC, Clare Canning.
In your Working Papers, you may wish to list all or some of them in a directory of names (who’s who), which may help you to avoid confusion of one person with another. Do not include such a list in your assignment, not even in an appendix. (No appendix is allowed.) If you include a list of names, they will affect the word count of your responses. An easy way to compile a directory is to use the ‘binoculars’ icon in Microsoft Word to navigate the text of the case electronically, so you can quickly find them.
It is for you to decide whose conduct and utterances should be of interest to you.
Background information about government departments, political offices and holders of political office
A number of political offices and government departments in the United Kingdom (UK) and elsewhere are identified. Government departments identified in the USA are: 1. Justice and 2. Defense.
The head of the UK government is called the Prime Minister. Margaret Thatcher was Prime Minister (PM) from 1979-1990; Tony Blair was PM from 1997-2007; and Gordon Brown was PM from 2007-2010. Political leaders of other countries identified in the case include Benjamin Mkapa, President of Tanzania from 1995-2005 and President Thabo Mbeki, President of South Africa from 1999-2008.
Senior members of the UK government are: the Foreign Secretary, in charge of the UK’s foreign policy; the Chancellor of the Exchequer, in charge of its finances; the Secretary of State for Defence, in charge of military issues; the Secretary of State for Justice, in charge of the legal system; and the Attorney-General, another senior member of the UK government in charge of legal system).
Robin Cook was Foreign Secretary from 1997-2003, when Tony Blair was PM; Gordon Brown was Chancellor of the Exchequer from 1997, until he replaced Tony Blair as PM in 2007; Lord Goldsmith was Attorney-General from 2001-2007; Jack Straw was Justice Secretary from 2007-2010.
Michael Heseltine was Defence Secretary from 1983-1986, when Margaret Thatcher was PM.
Ministers in the UK government, like Alan Johnson (of the Department of Trade and Industry) and Jonathan Aitken (in the Ministry of Defence), are subordinate to Secretaries of State.
Robert Wardle was Director of the SFO from 2003-2008. Richard Alderman succeeded him in 2008.
Judges identified in the case are: in the UK, Mr Justice Bean; in the USA, Judge Bates; and in Qatar, Lord Woolf, who used to be Lord Chief Justice of England and Wales, from 2000-2005.
Members of the royal family of Saudi Arabia, identified in the case, are the Saudi Ambassador to the US, the Prince Bandar bin Sultan; and the head of the Saudi Royal Air Force, Prince Turki bin Nasser.
The Case Study: “Our people understood why the decision had to be made.” (Robert Wardle)
13 November, 2006
In January, 1997, the chief executive officer (CEO) of British Aerospace (BAe), backed Tony Blair to become Prime Minister of the UK. Many business leaders did the same. Mr Blair was elected PM in May 1997. Robin Cook, the new government’s Foreign Secretary, strongly disapproved of Sir Dick’s influence on Mr Blair. Mr Cook wanted to promote an ‘ethical foreign policy.’ In 1999, BAe merged with Marconi Systems. The new firm was called BAE Systems (BAES). Mr Blair seemed to act like a salesman for BAES, trying to persuade the Czech Republic to buy Gripen fighter jets, worth $1bn.
In 2001, Gordon Brown, Chancellor of the Exchequer was furious that Tanzanian payments to BAES for a military air traffic control (ATC) system relied on debt relief that was meant to enable spending on Tanzanian education. A Liberal Democrat MP, Norman Lamb raised the issue. Alan Johnson, a minister in the Department of Trade and Industry, replied: “The Government has no evidence the deal was corrupt.” The World Bank said Tanzania’s purchase of a £28m system at least four times dearer than civilian radar was a “waste of money.” Benjamin Mpaka, Tanzanian President till 2005, said: “No one showed me any evidence [of wrongdoing].”
21 February, 2007
The ‘Al-Yamamah’ contract for the sale of BAe[1] Tornado fighter jets was the largest export order ever for a UK company. ‘Al-Yamamah 1’ was signed by Saudi Arabia’s Prince Bandar bin Sultan and Britain’s Secretary of State for Defence, Michael Heseltine, in 1986. A contract for the sale of more Tornado jets (‘Al-Yamamah 2’) was agreed in 1988, taking Al-Yamamah sales over $43b. Margaret Thatcher, PM from 1979 to 1990, was determined that the UK would win the order. Rumours began in 1986 about huge payments made to middlemen like Wafic Said, the billionaire benefactor of Oxford University’s Business School. Mrs Thatcher’s son, Mark, was later accused of taking commissions, allegedly £12m, for helping to set up the deal. Allegedly, he was a back-channel negotiator for Mr Said. Jonathan Aitken, a UK Defence Minister, was involved in negotiating the Al-Yamamah contract. Mr Aitken was imprisoned for perjury, because he claimed his wife paid the hotel bill when the couple spent a weekend at the Paris Ritz. She did not. Wafiq Said was at the Ritz during the same weekend.
In 2004, the Serious Fraud Office (SFO) began investigating BAES’s alleged £60m ‘slush fund’ that allegedly paid for prostitutes, Rolls-Royces and Californian holidays for members of the Saudi royal family. The main alleged recipient was Prince Turki bin Nasser, head of the Saudi Royal Air Force. In September 2006, the Saudis announced a plan to buy 72 BAES Eurofighter Typhoons to replace its Tornados in a new deal (‘Al-Salam’) worth £20bn to BAES. In November 2006, when the SFO got a Swiss judge to force Swiss banks to let it investigate Saudi-linked Swiss bank accounts, the Saudis threatened that the Al-Salam deal would not proceed. They also threatened to stop cooperating in the ‘War on Terror.’ The PM said the UK’s national interest faced “complete wreckage” if the investigation continued. The Attorney-General, Lord Goldsmith, said that the SFO inquiry would be discontinued: first, because there was insufficient evidence of corruption; and, second, to protect national security.
A National Audit Office (NAO) investigation into the Al-Yamamah deal found that the UK government had paid no bribes, but the NAO’s 1992 report had been suppressed because there were fears that its publication would offend the Saudis and put continuing trade relations at risk. However, documents detailing the cost of Al-Yamamah Tornados were accidentally released, including a telegram from Sir Colin Chandler, then head of the Defence Export Council. It shows that the price was increased by a third to £21.5m each, an extra £600m. Sources allege that it was members of the Saudi royal family who suggested this price increase, simply to get their kingdom’s cash diverted into their own Swiss bank accounts. Other sources say the higher price was only kept secret because the Saudis asked for a weapons upgrade that it wanted to hide from Iran and Israel. Middlemen almost certainly were paid, which was perfectly legal until an anti-bribery law was enacted in 2002.
23 February, 2007
Mike Turner, the Chief Executive Officer (CEO) of BAES, yesterday complained about the SFO’s investigations into allegedly inappropriate payments to win contracts in deals with Romania, Qatar, South Africa, Tanzania and the Czech Republic. He says BAES is innocent and wants the inquiries completed as quickly as possible. Mr Turner said: “We are fully complying with all the SFO’s requests. We are acting in a responsible and dignified way and we are very proud of this company. We think it is unfair and unjust that our reputation is being affected.”
02 May, 2007
Last week, it emerged that the US complained formally to the British Government over the decision last December to stop the Al-Yamamah investigation. The SFO and the US Department of Justice have discussed BAES payments to Red Diamond Trading (RDT), a BAES subsidiary registered in the British Virgin Islands (BVI). If the Department of Justice Corporate Fraud Task Force can show that transmissions from RDT entered the USA, BAES could be penalised under the US Foreign Corrupt Practices Act. If convicted, companies can be fined, forced to surrender profits from dishonest deals and barred from US government contracts. The executives of convicted companies can be jailed.
13 May, 2007
The Swiss federal prosecutor's office said it is investigating money laundering involving BAES. BAES’s money, allegedly, was paid into accounts linked to its ‘offshore’ subsidiaries.
BAES said: "We are committed to the highest ethical standards. Our ethical policy is underpinned by strict compliance and assurance processes. We will not tolerate bribery."
11 June, 2007
Prince Bandar bin Sultan, former Saudi ambassador to Washington, denies that he got £1bn from BAES. The Prince said today that allegations made in The Guardian, about his role in Al-Yamamah and an account at Riggs Bank “are not only untrue but grotesque in their absurdity. Further, it can be stated categorically that BAES was not party to the account.” He says the bank account was not his own but the Saudi Government’s, audited annually by the Saudi Ministry of Finance: “I required and obtained all requisite Saudi Government authority to disburse any funds from the Riggs account.” He said that the Saudi account had been reviewed by US authorities: “No wrongdoing was found.”
BAES awaits regulatory approval in the US to buy the Humvee maker, Armor Holdings.
11 June, 2007
Newcastle-born Lord Woolf, 74, was Britain’s most senior judge, the Lord Chief Justice of England and Wales, till he retired in 2005. He chairs the Bank of England’s Financial Markets Law Committee. In February, he became President of the Qatar Financial Centre Civil and Commercial Court in Doha.
BAES has asked Lord Woolf to lead an independent panel of investigators, who will inquire into BAES’s ethical standards and conduct. However, Lord Woolf will not examine Al-Yamamah. His inquiry is likely to centre only on the more recent Al-Salam contract. The SFO is still investigating BAES’s conduct in the Czech Republic, Romania and South Africa. It would be inappropriate for the Woolf Panel to inquire into deals with these countries, while SFO inquiries are still in progress.
Allegedly, in 2001, middlemen (called ‘advisers’ by BAES) helped BAES win a contract worth £1b by ensuring that the Czech Republic did not buy American fighter jets; in 2003, allegedly, a Romanian politician got £6m to help BAES win a £116m contract from his government to refit two ships, sold to BAES by the MoD for only £200k; in South Africa, in 2001, £75m was allegedly paid to advisers. The SFO is also examining a related £1.6b deal to sell Saab Gripen fighter jets to South Africa. BAES owns 20% of Saab and advisers helped seal the deal. The SFO thinks advisers bribed South African officials and ministers to fix the deal. A deal for Hawk training jets and Gripen jets in 1999 was worth £2.3b. Documents submitted to South African courts say middlemen got £115m in commissions.
BAES said: “As with all our business, we regularly audit arrangements [with advisers] to ensure nothing improper is taking place and that we are receiving value for money for advisers’ knowledge.”