Justice Investigates BAE

From Reuters, about a defense contractor with a big local presence here:

LONDON (Reuters) - The U.S. Department of Justice has launched an investigation of Britain's BAE Systems Plc over the defense company's compliance with anti-corruption laws, including its dealings with Saudi Arabia.

Shares in BAE, Europe's biggest military contractor, fell as much as 10 percent in early Tuesday trading on fears the probe could lead to fines, disrupt the group's extensive interests in the United States, and damage its relations with Saudi Arabia.

Britain's Serious Fraud Office dropped an inquiry into BAE's dealings with Saudi Arabia in December last year after Prime Minister Tony Blair said it would harm national security and relations with the Gulf kingdom.

"BAE Systems has been notified by the U.S. Department of Justice that it has commenced a formal investigation relating to the company's compliance with anti-corruption laws including the company's business concerning the Kingdom of Saudi Arabia," the company said in a brief statement.

BAE has denied making wrongful payments in its dealings with Saudi Arabia, which include Britain's biggest arms export deal, known as al-Yamamah, that dates back to the 1980s and was worth an estimated 43 billion pounds ($86 billion).

The firm, which makes Typhoon jet fighters, Nimrod reconnaissance planes and nuclear-powered submarines, also has a new agreement, known as Al-Salam, to supply Saudi Arabia with 72 Eurofighter jets.

"This is bad for sentiment and could delay the signing of the Salam deal," said Panmure Gordon analyst Nick Cunningham. "But it is unlikely to have a material financial impact and could ultimately cauterize the seeping wound of Saudi related allegations."

U.S. FORCE

BAE has become an increasingly powerful force in the lucrative U.S. military market, making two multibillion dollar acquisitions there in as many years after selling its stake in troubled European planemaker Airbus.

One analyst, who declined to be named, said the Department of Justice (DoJ) investigation followed lobbying by BAE's U.S. rivals seeking to disrupt the latest deal with Saudi Arabia, though he saw little chance of this happening.

He noted that BAE received approval last week from the Committee on Foreign Investment in the United States for its latest deal -- the $4.1 billion purchase of body armor and army truck maker Armor Holdings -- and said this suggested there was no real threat to BAE's U.S. business from the DoJ inquiry.

"The uncertainty is whether there will be any fines, and what those might be," he said.

ETHICS

British media reports have accused BAE of paying 1 billion pounds over a decade to Saudi Prince Bandar bin Sultan in connection with the al-Yamamah deal.

Bandar, former Saudi ambassador to the United States and now Secretary General of the Saudi National Security Council, has strongly denied the sums involved represented secret commissions to him, describing this as "a zenith in fabrication".

Solicitors for Bandar have said the U.S. accounts at Riggs Bank into which the funds were paid were in the name of the Saudi Arabian Ministry of Defense and Aviation. Any monies paid from them were exclusively for ministry purposes.

BAE has said al-Yamamah was a government-to-government agreement and so all payments involved were made with the express approval of both the Saudi and British governments.

A spokesman at Blair's office said: "We can't comment on legal proceedings that haven't started yet, but we will be watching the proceedings with interest." Britain's Ministry of Defense said it had no immediate comment.

BAE said earlier this month it had asked a former top English law official, Lord Woolf, to lead a review of its business ethics, although this will not include its past dealings with Saudi Arabia.

At 0845 GMT, BAE shares were down 8.7 percent at 403.75 pence, valuing the business at about 14.2 billion pounds.

(Additional reporting by David Clarke)

By Dan Beyers  |  June 26, 2007; 8:29 AM ET  | Category:  Aerospace & Defense
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